Stock up on scrips that pay high dividends

Such shares often outperform their benchmarks and should form the core of long-term investors’ portfolio.

High volatility with a downward bias has seen even blue-chip stocks being beaten down in the past few months. This has left investors wondering which stocks to invest in. One safe option could be companies that reward their shareholders through dividends.

“Those that have consistently increased their dividend payouts are your best bet. Also, look at the company's cash levels, since dividends are paid out of a company's cash reserves,” says Motilal Oswal, chairman and managing director at Motilal Oswal Financial Services.

This is because even if the price of the share is falling, good dividend-paying companies will ensure the loss in capital gains is made up through dividends. For instance, Ashok Leyland paid Rs 2 as dividend last quarter (200 per cent on the face value of Rs 1). The stock price, however, has fallen 65 per cent.

But the owner of the Ashok Leyland shares is better off than many other investors because he has been paid a dividend, despite the loss in capital value of the stock. A high dividend yield tells us the returns (in percentage terms) that shareholders get in the form of dividends.

Among the BSE top 100 scrips, a number of companies like Ashok Leyland, Hero MotoCorp (erstwhile Hero Honda), Rural Electrification Corporation, ONGC, IDBI Bank and NHPC have given out dividends consistently for the past five years.

“In a market downturn, buying stocks of companies with a high dividend yield is considered a good defensive strategy. Generally, this strategy pays up well when the market recovers from the bottom,” said Rajesh Jain, executive vice president and head of retail research at Religare Securities.

According to a Religare Securities report, such stocks often outperform their benchmark. In 2008, when the Nifty had gone down 50 per cent, the top 10 dividend-yielding stocks fell only 32 per cent. In 2009, while the Nifty rose 72 per cent, this portfolio soared 203 per cent. In 2010, when the Nifty rose 12.2 per cent, the dividend portfolio jumped 27.3 per cent.

Dividend policies differ across companies and sectors. Infrastructure companies pay very low dividends due to their high-cap expenditure needs. Whereas, fast moving consumer goods companies, with higher cash reserves, have had a history of paying high dividends.

Public sector undertakings (PSU) also pay good dividends. Jagannadham Thunuguntla, equity head, SMC Capitals, says, “The government, which holds a majority stake in PSUs, uses the dividend from these companies as a means of revenue and often pushes the PSUs to pay higher dividends. It will be good to look at cash-rich PSUs like Coal India and ONGC.”

According to G Chokkalingam, executive director, Centrum Wealth Management, in a falling market, with the price-to-earnings ratio and share price of companies dropping at a faster rate than its fundamentals, the dividend-yield of many companies is likely to improve.