High dividend yield stocks provide not just a source of fixed income but also provide an added advantage of ‘inflation hedge, a characteristic that equity as an asset class carries.
Investors have recently tiptoed back into value stocks, those that typically trade at low prices relative to their earnings.
Dividend yield stocks are looking to become more attractive as liquidity rises and real interest rates decline. Domestic brokerage and research firm ICICI Direct said that in the past, dividend stocks performed well during sustained periods of low real yields. The brokerage firm’s observation of rolling one-year returns indicates that bulk of the outperformance of Nifty Dividend Opportunities 50 index was between financial year 2010 and 2012 period when real yields remained negative persistently.
“Over the past one year, as interest rates continued to dip and inflation rose, real interest rate has dipped into negative territory which improves prospects for high dividend yield stocks,” ICICI Direct said in a recent note.
With low interest rates expected to stay for a few years, dividend stocks are better placed according to ICICI Direct. “Postponement of capex spending and improved balance sheet strength of India Inc. will allow higher dividend payment/buybacks in the near term,” the report said. In the last financial year capex of India Inc was at Rs 5.4 lakh crore against Rs 5.8 lakh crore in financial year 2019 while cash flow from operations improved to Rs 8.8 lakh crore. Private capex is expected to remain muted in the near term owing to macro challenges of weak demand and lower utilisation levels. However, improving cash flows will leave more space for dividends and buybacks in ICICI Direct’s view.
Dividend: Fixed income and inflation hedge
High dividend yield stocks provide not just a source of fixed income but also provide an added advantage of ‘inflation hedge, a characteristic that equity as an asset class carries. With interest rates low, dividend yield stocks have now scaled to the level of fixed income assets.
Highlighting the extra edge that dividend plays while investing, ICICI Direct said that Nifty price return CAGR has been 12.6% over the past 20 years, while total return, based on dividend reinvestment, has been 14.3%. “Rs 10 lakh invested in June 1999 in Nifty 50 index has turned into Rs 37 lakh solely on the back of reinvestment of dividends, while capital appreciation gain has turned into Rs 1.08 crore,” they said.
Marquee dividend stocks
Some of the marquee dividend plays in the listed space that ICICI Direct has mention in the report include Coal India with a dividend yield of 9.8%, Hindustan Zinc with 7.4% yield, ONGC and GAIL at 6.9% and 6.8%, respectively. ITC, Power Grid, IOCL, NMDC are other such plays. Among equity indices, the CPSE and the dividend opportunities 50 index have the highest dividend yields currently at 6% and 3.65%.