Monday, October 22, 2012
High Dividend Yield Stocks offer Value Investing
As we all know that High Dividend Yield Stocks can be consider as a safe haven where safety has greater priority compared to high returns. Specially, when the market remains volatile and lot of uncertainity arises due to headwinds coming from domestic and global factors. Investors can still get a decent return on the Investment made in High Dividend Yield Stocks. Investing in a such kind of High Dividend paying companies is also one of Value Investing Strategy.
Value Investors look at the Intrinstic Value of a firm. They hold stocks for long term and look to gain from dividends, capital appreciation, buybacks, bonus issues etc. One of the indicators of a firm’s value to the shareholders is its dividend yield.
A sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves). Dividends are mostly paid quartely or annually.
Why is dividend important?
Dividend is a direct income for a shareholder without selling any of the holdings. Therefore a shareholder can hold on to the stock and still earn an income sitting at home. In a bull market, dividend would add to the overall capital appreciation and improve gains. In a bear market, a high dividend stock can offset some of the capital loss. Hence, a high dividend stock would always find favor in any market conditions. Rising dividends also indicate financial soundness of a firm and a strong cash flow.
Dividend yield gives the income earned from stock holding from dividends alone. It is calculated on the basis of the dividend paid per share and the current market price per share.
Dividend Yield = (Dividend per share/CMP) x 100
For example, HCL Info’s dividend yield is given by:
Dividend Yield = (8/43.45) x 100 = 28.41%
This implies, if the earnings and dividend payout ratio remains the same for this financial year, if an investor purchases shares of HCL Info at current market price, he/she would earn a return of 20% from dividends alone.
Criteria for Selection of High Dividend Yield Stocks
We have taken S&P CNX 500 as a banchmark for Stock selection. We have qualify the companies from CNX 500 which is giving regular Dividends since last 5 years with Current Dividend Yield of 4.00%. We have also considered the valuation of selected companies such as Low P/E ratio with cheaper than Industry along with Price to Book Value less than 2. Below is the list of 12 qualified companies as per the mention criteria.
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Here are the 4 major reasons why dividend-paying stocks tend to fall less during volatile markets:
1. The Quality of Earnings is Higher
It’s hard to fake cash. When shareholders get checks in the mail, there is at least some proof that the earnings aren’t just accounting magic. This makes people more comfortable holding the stocks during uncertain times because they know there is some value there.
2. Dividend paying stocks generate current income
In depressions, recessions, or bear markets, many people may find themselves unemployed or earning less than they did during boom years. During times like this, you don’t want to part with something that consistently brings in funds for your family to use to buy groceries and gas unless you must. Typically, the shares of high growing, low payout stocks are the first, and hardest, to fall because you can’t use them to keep the power bill paid.
3. These stocks become “yield supported”
As share price falls, dividend yield gets higher (the cash dividend divided by the share price is known as “dividend yield”). Imagine if a Rs. 200 stock paid a Rs. 10 annual cash dividend. That’s a 5% return, which you would compare to all kinds of other available options such as money market accounts, bonds, etc. If the stock fell to Rs. 100 per share, the yield would suddenly be 10%. The stock would become more attractive and people or companies that did have excess funds, such as insurance groups or international corporations not damaged by domestic problems, are lured in by the relatively higher returns they can earn. If a company is healthy, in a world of 5% interest rates, it’s highly unlikely that it’s going to have a dividend yield of 15% or 20% because someone, somewhere, with a whole lot of cash is going to step into the situation.
4. Management doesn’t have as much capital to allocate
Human nature being what it is, it’s often normal for executives to want to go on an empire-building spree, even if it means earning less attractive returns than their shareholders could if the money was put back into their hands. An established dividend policy solves a big part of this problem by limiting the funds that are available for overpriced acquisitions.
12 High Dividend Yield Stocks of 2012