Dividend Yield stocks which have become attractive

Falling bond yields and marginal tax rate cut from 34.94% to 25.15% will improve the dividend payout profile of India Inc. immediately as capital allocation decisions on new investment may happen with a lag as demand environment remains weak.

Q) High dividend yield stocks have performed better in a falling real bond yield environment. What are your views?

A) High dividend yield stocks are ones which pay a high dividend as a percentage to the market price of its share. Although when it comes to stocks, investors prefer capital appreciation to dividend yield, but that doesn’t lessen the importance of dividends by the slightest. Under a falling bond yield environment, which makes it difficult to generate regular income by holding government debt, high dividend yielding stocks become more popular due to its stable income generation characteristic for investors looking to add income to their portfolios.

Q) If investors consistently reinvest dividend back into the markets. What are the kind of returns or alpha he could generate? A small example would be helpful.

A) When selecting high dividend paying stocks, investors must ensure they are paying attention to other fundamental factors as well such as the sales and profit growth of the company, EPS, debt vs. equity and so on. If selected carefully, one can generate high alpha by re-investing the dividends back into the markets. For example, if one had re-invested all dividends received from HUL in the last 10 years at the then prevailing prices, one would have had additional 25 shares of HUL today for every 100 shares held 10 years ago. This means an alpha of 25% over and above other returns such as capital gains. See below table for the calculation.