High Dividend Paying Stocks & Mutual Fund Schemes

High dividend-paying stocks & Mutual Fund schemes

Investing in high dividend-paying stocks and Mutual Fund schemes can give individuals the dual advantage of generating income and potential capital appreciation. These investments cater to people who seek recurring income streams while simultaneously participating in the wealth-building potential of the financial markets.

Mutual Fund schemes, specifically designed to focus on stocks with high dividend yields offer investors a professionally managed and diversified approach to income-oriented investing. These schemes pool resources from various investors and allocate them to a diverse portfolio of dividend-paying stocks, providing a convenient and diversified investment avenue for income-seeking investors.

This blog will look at high dividend yield stocks and Mutual Funds including their characteristics, benefits and considerations for investors. It will also focus on how to find the best Mutual Fund.

Why consider investing in dividend-paying stocks?

Investors often wonder whether a company's commitment to paying high dividends makes it a more attractive investment option. To find an answer, it is important to consider the various factors that are applicable in this context.

Gratification factor:

Research has consistently shown that even when additional income is not necessary, having some extra cash in hand brings joy and financial security. Dividends play an important role in fulfilling this sense of gratification.

Market perception:

Dividends often indicate a company's potential for price appreciation, strong cash flows and optimism about the business. During uncertain economic times, dividends gain even more importance as they reflect stability.

Limitations of the high dividend yield approach

While the high dividend yield approach to investing has its advantages, it is also important to understand its limitations:

Limited availability of high dividend yield stocks

It is widely acknowledged that high dividend yield stocks are rare, especially in the Indian market. There are only around 15-20 such stocks that pay high dividends.

Dividend history

Evaluating a company's history of dividend payments is essential for investors to determine whether the current high dividend yield is sustainable or temporary.

Some stocks may appear attractive in terms of yield but a closer look at their dividend history may reveal inconsistencies.

High dividend yields linked to falling stock prices

While certain stocks may offer high dividend yields, this could be due to the significant decline in their share prices. While a high dividend yield may seem appealing initially, it may result from adverse market conditions and such yields may not be sustainable in the long run.

Dividend Yield Funds

Mutual Funds have a specialised category known as Dividend Yield Funds. These funds are structured to identify and invest in companies offering higher dividend yields than benchmark indices like the Nifty 50 or Nifty 500.

The Securities and Exchange Board of India (SEBI) mandates that Dividend Yield Funds allocate at least 65% of their assets to dividend yield stocks. Interestingly, SEBI has not stipulated a minimum yield requirement for stocks to be included in these funds. This flexibility allows fund managers to invest in companies that may pay either low dividends or none at all.

How to find the best Mutual Fund

Finding the best Mutual Fund involves thorough research and considering your financial goals, risk tolerance and investment horizon. Start by defining your objectives, whether you are looking at long-term wealth accumulation or short-term gains. Assess your risk tolerance to determine whether you are comfortable with high-risk, high-reward funds or prefer lower-risk options. Research about Mutual Funds, analyse their past performances, Expense Ratios and track records of the fund managers. Diversify your portfolio across different asset classes to spread risk. Consider consulting a financial advisor for personalised guidance. Remember, the best Mutual Fund for one person may not be the same for another so tailor your choices to your unique circumstances.

Investing in high dividend yield stocks:

Strategies

For investors interested in high dividend yield stocks, here are some strategies to consider:

Consider additional factors:

Combine dividend yield with other relevant factors, particularly those associated with defensive investments. Consider directing investments towards high dividend yield stocks in the healthcare sector or the Fast Moving Consumer Goods (FMCG) sector, indicating a growing demand curve. Additionally, choose companies with low debt levels as they are more likely to prioritise dividend payments over debt repayment during economic downturns.

Pick growers over payers:

Research and studies consistently indicate that the companies with a history of constantly growing dividends often make better investments than those with high current dividend payouts. Companies that have increased their dividends annually for 20 years or more, referred to as dividend aristocrats, tend to outperform their peers.

Dividend vs fixed income:

For long-term investors with a tolerance for some degree of volatility, consider reallocating a portion of your fixed income investments to dividend-oriented equities. This shift could increase your portfolio's yield and reduce its sensitivity to fluctuations in the interest rates. However, it is important to note this adjustment may also introduce higher portfolio volatility.

Conclusion

Data and insights suggest that investing in high dividend-paying stocks can be wise, especially during bear markets or economic downturns. However, it is essential to know that the key lies in identifying solid dividend yield stocks while understanding they may not perform as strongly during market rallies. Allocating a portion of your portfolio to these stocks is advisable rather than adopting an all-in approach.

Finding the right balance between dividend-paying assets and other investment types is important. While high dividend yield stocks can offer stability and income, constructing a diversified portfolio that includes various asset classes remains a sound approach for achieving long-term financial goals.