High dividend yielding stocks turning into a stock market trend? Is High yield = High risk? | All explained
India Inc’s capex during FY20 stood at Rs 5.4 tn compared to Rs 5.8 tn in FY19 while cash flow from operations improved to Rs 8.8 tn. Going by management commentary and the macro challenge of weak demand and lower utilisation levels in the system, we expect private capex to remain subdued in the near term while cash flows improve leaving more financial resources for dividends and buybacks.
High dividend yield stocks have performed better in a falling real interest rate environment: Observation of rolling one-year returns indicate bulk of the outperformance of Nifty Dividend Opportunities 50 index was during the FY10-12 period when real yields remained negative persistently. ICICI Securities says that over the past one year, as interest rates continued to dip and inflation rose, the real interest rate has dipped into negative territory which improves prospects for high dividend yield stocks.
High dividend yield stocks appear attractive as their yields are now comparable to other fixed income instruments while having the added advantage of ‘inflation hedge’ characteristics of stocks as an asset class.
Postponement of capex spending and improved balance sheet strength of India Inc. will allow higher dividend payment/buybacks in the near term : As per capex analysis, India Inc’s capex during FY20 stood at Rs 5.4 tn compared to Rs 5.8 tn in FY19 while cash flow from operations improved to Rs 8.8 tn. Going by management commentary and the macro challenge of weak demand and lower utilisation levels in the system, we expect private capex to remain subdued in the near term while cash flows improve leaving more financial resources for dividends and buybacks.
Dividends contribute significantly to total returns of benchmark index over the long term: ICICI Securities highlights 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%. This extra return from reinvested dividends is 3x the original invested amount – Rs 1 mn invested in Jun’99 in Nifty50 index has turned into Rs 3.7 mn solely on the back of reinvestment of dividends, while capital appreciation gain has turned into Rs 10.8 mn
Relative dividend yield of equity asset classes - Amongst the equity benchmark indices, the CPSE and the dividend opportunities 50 index have the highest dividend yields currently at 6% and 3.65%, while the lowest is offered by growth sectors 15 and Bank Nifty at 0.99% and 0.4%, respectively.
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High yield = High risk? Risk of declining/stressed industries: Typically, high yielding assets are associated with high risk (high yielding bonds are considered junk) and efficient markets will price higher risks with higher yields. Prudent dividend yield strategy can control the above risks by identifying stable businesses with robust fundamentals (adequate RoE’s and cash flows) and a check on ‘quality of earnings’.
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