The US business magnate and philanthropist John D Rockefeller once mentioned, ‘do you know the only thing that gives me pleasure? It’s to see mycoming in’.
are eagerly sought by a certain set of equity investors. Back home, when the equity market took a free fall early this year, some advisors recommended yield for its conservative investors.
Touted as the best bet in bearish times, do thesereally need to be part of your ?
Let’s understand them. These arethat at least 65 per cent of their equity into high -yielding stocks. The latter refers to stocks that are a part of opportunities 50 Index or have a yield higher than that of at the time of .
How is a dividend yield calculated?
It is calculated by dividing theper share by the latest share price of a company and multiplying the result by 100. For instance, if a company pays an annual of Rs 10 and its latest share price is Rs 200, yield is 5 per cent (10/200*100).
As thepaid increases, the yield also increases. It can also increase with a fall in the share price of the company.
Theyield of opportunities 50 index is currently hovering around 3.7 per cent and had gone up to 5.76 in March ‘20 when the stock market hit a low (see chart).
Why invest in dividend-yielding stocks?
track-record of a company largely communicates about its financial well-being. After all, it can pay consistent only if it generates cash. It is a popular measure of value-based process.
Usually, companies from mature or non-cyclical businesses pay. These companies might be highly profitable but not have much opportunities; so it will share its profits with the shareholders in the form of . ITC, Infosys, Hindustan Unilever, TCS and Nestle are the top stocks in terms of weightage in the opportunities 50 index. FMCG and the technology sector itself constitute 53 per cent of this index.
In a bearish market, theirmight provide downside protection to its stock prices. Since, if their share prices fall, they start looking attractive in terms of yield.
However, all stocks with highyields aren’t necessarily attractive. Some stock price correction might be because of weak financials – which will reflect later in terms of lower or skipping of in the future. So, fund managers usually juxtapose yield along with other filters to construct their stock .
Dividend v/s price appreciation
Historically, Indian shareholders have earned much more from share price appreciation than in the form of. 500 TRI was up 126 per cent in the last 10 years as against 101 per cent for 500. It hints at a comprising just 20 per cent of overall index returns.
Only oneout of a handful managed to beat the S&P BSE 500 TRI. Moreover, these lag the performance of large-cap – on risk as well as return measures. On a risk-adjusted return basis, large-cap have been found to be better than yield . They are less volatile than yield , while also giving higher average returns for the period.
yield also have higher exposure (42% on an average) in mid and smallcap stocks that make them a riskier lot.
yield might provide downside protection during bearish times, but their overall performance isn’t encouraging. Investors are better-off with large-cap which provide superior risk-return trade-offs.