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Your lifeboat in bear market: Stocks that may still break even come hell or high water

Such sustained selling usually allows investors to pick stocks at lower prices.

Updated: Sep 03, 2019, 12.56 PM IST
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Many of the listed companies have a good track record of delivering substantially better dividend than the interest rates you earn on your savings account.
Wealth creation is getting challenging? Ha-ha, when was it not?

If you are not aware, there is a solid lifeboat to sail through a bear market. Amid falling interest rates and severe selling pressure in domestic equities, high dividend yield stocks can help you stay on the winning side, and how!

Many of the listed companies have a good track record of delivering substantially better dividend than the interest rates you earn on your savings account.

Data available with Ace Equity showed as many as five companies on BSE have managed to maintain a dividend yield of at least four per cent in last five years. The chart topper is, of course, public sector miner Coal India, which has a dividend yield of over 5 per cent.

State Bank of India (SBI), the country’s biggest lender by assets, currently offers an interest rate of 3.50 per cent on savings deposit balance of up to Rs 1 crore and 4 per cent above Rs 1 crore.

Concerns over an economic slowdown and US-China trade tensions have put equity investors in a fix. The ongoing correction in the domestic market has already wiped off nearly Rs 12 lakh crore of investors’ wealth on BSE since January 2018, with over 85 per cent of stocks are now trading in the red.

Such sustained selling usually allows investors to pick stocks at lower prices. And in the case of dividend payers, the equation gets even more attractive as dividend yields go up when prices go down. This mean this bear market has essentially thrown open a shopping season for stock pickers.

“It is a good idea to shop for high dividend yield stocks in a bear market. You are sure that even if the stock price falls from the levels you buy, you can wait for a long time for the stock to rise to a level where you can sell it for a profit,” says VK Sharma, Head - PCG & Capital Market Strategy, HDFC Securities.

June quarter GDP print showed the domestic economy in deep pain, which means the market may remain volatile for an extended period in spite of the booster dose that the government has offered to try and pump-prime the economy.

“High dividend yield stocks assure you a good return in the form of a dividend even if a stock does not appreciate. This allows you to hold a stock in a bear market. You can buy such stocks in a bear market and fix your dividend yield forever, as long as the company does not reduce the same,” says Sharma of HDFC Securities.

Economists have cut their growth forecasts for Indian economy and predicted deeper interest-rate cuts after data showed a sharper-than-expected slump in output.

Goldman Sachs Group and Citigroup have lowered their growth projections to 6 per cent for the financial year through March 2020, while Oxford Economics said there’s a risk the expansion could be weaker than that

“In a period where the economy is not growing very fast, utilities and dividend yield stocks are two very interesting areas to look at,” says S Naren, ED & CIO, ICICI Prudential AMC.

The country’s economic growth already dropped to more than six-year low of 5 per cent in the April-June quarter of 2019-20 due to a sharp deceleration in the manufacturing sector and sluggish agriculture output, according to official data released on Friday.

Indian automakers reported up to 60 per cent drop in August sales, signalling deeper slowdown in discretionary consumption.

India Ratings has lowered its FY20 growth forecast to six-year low of 6.7 per cent from an earlier estimate of 7.3 per cent on account of slowdown in consumption and moderation in industrial growth among other factors.

“Investors should chase beaten-down stocks that have quality earnings trajectory at least for the next two years and also offering good dividend yield at current market price. Coal India, Petronet LNG and ONGC have corrected significantly from their respective tops. This is the right time to accumulate such stocks,” said Sanjeev Hota, Head of Research, Sharekhan.

Other public sector players Balmer Lawrie Investments, Oil India and NLC India (formerly known as Neyveli Lignite Corporation) have also maintained a dividend yield rate of over 4 per cent in last five years, while healthcare services firm NG Industries is the only private firm to maintain a dividend yield of between 4-6 per cent during FY15-19.

PSUs have been paying high dividends in recent years also under pressure from the government to help bridge its own revenue gap. With the government having got a bonanza from RBI this year, that pressure might ease some bit this year, leading to lesser dividend payment in some case.

For the financial year ended March 2019, Nalco, Vedanta, Graphite India, Hindustan Zinc, REC, HPCL, NMDC, BPCL, Power Grid, Firstsource Solutions, PNB Gilts, Ircon International and Indiabulls Housing Finance were among 45 companies with dividend yield between 4-13 per cent.

Investors must remember that a dividend payout is totally a function of the earnings, the desire of the management to pay dividend also depends on the capex plan in hand. Past track record is no guarantee that a dividend will be paid, but consistency of dividend payments helps one understand the management policy.

Income received as dividend is tax-free to the extent of Rs 10 lakh per annum, which is an icing on the cake for investors.

However, there should be a proper exit strategy before investing in high dividend counters. Hota said investors should cut their positions when the tide turns and the market stabilises. “One should go for high-beta stocks when there are hopes that the market will go higher in near term,” he said
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