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Share"Tumhara number kya hai?" asked my friend Murali in college, after the Operations Research class.
It was that black day when the papers for the previous test were distributed. It was a number I could hardly have announced. For me, Operations Research was more like Operation Theatre -- a shake-up of the internals. So I mumbled something, changed the subject and reminded him of my sudden decision to treat him with a milkshake. He never talked about my "number" again!
Like my "numbers", dividend yields of companies in a normal market tend to be low. And virtually no one bothers about dividend yield when they invest in the stock market, though the return from stock market investment is calculated as a sum of dividend yields and capital appreciation. Most are looking at capital appreciation, primarily.
These dividend yields have improved tremendously, of late. What dividend yields are we talking about? Dividend yield stands for the dividend distributed by a company to the current market price of the stock. Let us take an example. Let us say, Company A distributed a dividend of 20%. Dividend is distributed on the par value of the stock. Assuming the par value of the stock of company A is Rs 10, the dividend distributed would be Rs 2. Now, let us assume that the current market price of this stock is Rs 20, then the dividend yield of the stock is 10% (i e. 2/20 x 100).
If a company were to give a dividend yield of say 10%, that would be great as it becomes comparable to the yield of a debt instrument. Then, you also have the prospect of capital appreciation due to stock price increase.
Sounds too good to be true? But the meltdown has now thrown up precisely those kind of opportunities.
Investing in equities or mutual funds with a long term orientation is being recommended now by most investment advisors. Though investors know it is a good time to invest, there is a fear psychosis and they are paralysed with fear. They are not sure if the stock market will go down further. They do not want further losses.
Hence, investing in good dividend yield companies would be a good idea, as it addresses this problem to a great extent. Even if the markets go down further and the stock prices slide, the investors will at least get decent dividends. Hence, it is a good hedging strategy at this point.
Interestingly, such opportunities exist across the spectrum -- not just small caps, but even bluechips (see table). The table contains a mixed bag of companies which have been shown for illustrative purposes. Due care and diligence still needs to be taken before investing in them.
There are interesting possibilities. When selecting stocks, there are a few good principles. One could select stocks which would not be much affected by a downturn -- say FMCG, telecom, entertainment etc. Also, in this market condition, large-caps/ bluechips are seen as a safe haven.
The other good place to park money would be among leaders in their sectors - such as Biocon among biotech companies, Balaji Telefilms in entertainment, Gillette in FMCG, etc. Leaders in their industry typically have brand equity/ pull and more pricing power as compared to competitors and tend to weather the storms better. These stock selection criteria can be used along with the dividend yield criterion when selecting stocks.
There is one caveat, though. The dividend yield seen now may not be replicated in future and may come down as there is some deceleration seen now.
Hence, if companies are earning less, they will also distribute less dividend. But then, even if comes down by 25% or more, it still gives a good cushion and would still give a platform to stand on, compared with regular investment in stocks.
Also, if the dividend prospects dim in future, the stock prices will also come down. If one buys shares at that time, then dividend yield will be more or less preserved. Hence, creeping acquisition over time, as done in SIPs, would be a good idea even here.
The "numbers" that are low now are the stock prices. Catching these low-hanging fruits could be a good strategy, especially when coupled with high dividend yields.
The writer is a certified financial planner who runs Ladder 7 Financial Advisories and can be reached at ladder7@gmail.com
