NEW DELHI: The long-shunned defensive themes are in vogue these days. Consistency of performance is turning out to be the biggest unique selling proposition on Dalal Street in times of Covid-19.
Whether it is an IT stock or pharma, investors are seeking a sense of certainty and earnings visibility in everything they buy. This gave another defensive theme a big lift: high dividend yielding stocks.
Thatâs even when there is an RBI ban on dividend payment by PSU banks till September quarter and uncertainty over such payouts by other companies because of business disruptions.
Not just because it is defensive, but the theme earns credence from the fact that bank fixed deposit rates in India have come down quite a bit. Stocks with a consistent record of high dividend yields of 5 per cent or above not only promise dividend, but offer a chance to appreciate capital as well, said analysts. They are generally mature, cash-rich companies and assure consistency of performance.
Amid the recent recovery in domestic stocks, this theme is playing out quietly.
âDividend yields stocks are bear market lifeboats,â says Devarsh Vakil, Deputy Head of Retail Research at HDFC Securities. âSuch investments make sense as long as the company pays regular dividends.â
All investors face a dilemma when they approach equity. In a falling market, when there is no certainty when stocks would bottom out, investors tend to avoid stocks. And when stocks start rising, they become unsure whether a bull market has begun and keep waiting.
âWhen a bull market is finally fully established, investors fool themselves into thinking that when they did not buy stocks at low prices, why should they buy them at higher prices,â Vakil pointed out.
Dalal Street giving them similar dilemma today. BSE Sensex is up 50 per cent from its 52-week low of 25,638 hit on March 23, and investors continue to rue having missed the bus.
âBut the moment you start looking at stocks from a dividend yield point of view, you start becoming comfortable with the market and begin to find logic in investing even at current prices, when others are staying away. In fact, your comfort level gets so high that you start celebrating a market fall,â Vakil said.
There are two aspects to betting on high dividend yield stocks, says Narendra Solanki, Head of Fundamental Research at Anand Rathi Financial Services. âThey are defensive. Besides, you can view them as companies in their mature phase of growth, where they are unable to grow businesses organically and thus distributing whatever cash they are generating. While they can always make acquisitions, shareholders generally prefer no such action in difficult times like this,” he said.
There are chances that certain consistent dividend-paying companies may avoid offering dividends this year due to the Covid19-led business disruptions.
As Sanjiv Bhasin of IIFL points out, RBI governor Shaktikanta Das in April banned PSU banks from paying dividends, and asked them to conserve capital instead. The RBI Governor said the restriction would be reviewed on the basis of the financial position of banks in September quarter.
âFor banks, the case is different. Banks are running high non-performing assets. RBI does not want their net worth to fall further. That may not be true for non-financial companies,â Solanki said.
Solanki said falling bond yields and fixed deposit rates could also be a reason to look at high dividend yield stocks now, as they offer a chance to lock in fixed returns and look for capital appreciation.
One-year fixed deposit rate for SBI currently stands at 5.1 per cent.
Vakil likes high dividend paying companies such as Oil India, IOC, ITC, Sonata Software and GIC RE, among others.