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High dividend yield companies back in demand

MUMBAI: The uncertainty in the equity market over extremely negative global cues has offered long-term investors an opportunity to pick stocks selectively. Analysts say that many companies with good dividend payouts record have corrected significantly even though their earnings continue to remain stable.
They advise risk-averse investors to focus on high dividend yield stocks as they offer a margin of safety in volatile market conditions. Dividend yield is the ratio of equity dividend per share divided by the stock price. Historically, dividend paying companies offer the best resistance to downward price pressure . Normally, these companies are in the maturity stage generating good cash flows and don't reinvest the whole part in the business passing on the cash to shareholders.

"These stocks are generally preferred by the value investors who prefer a payback on their investments in terms of visible cash flows — dividends compared with capital appreciation due to the growth prospects of a company," said Pankaj Pandey, head-Research , ICICI Securities . This strategy pays off handsomely during uncertain times, he said.
For instance, Shipping Corporation of India (SCI) has underperformed the benchmark indices by over 22% in the past three months, but is currently trading at attractive valuations offering a potential dividend yield of over 6.5%. Analysts say that the difficult charter rate scenario is likely to assert pressure on earnings in the next couple of quarters , but given that the stock trades at a significant discount to its peers, they recommend that it can be accumulated at current levels. On Monday , the stock closed at Rs 108.95, down 1.5% with volumes higher than its two-week average.
According to Mr Pandey, investors can look at more than 7% returns in the form of rolling dividend yield in J&K Bank in the next 15 months. Apart from these, stocks such as Indiabulls Financial Services, GNFC, Jagran Prakashan, Mcloed Russel, Chambal Fertilisers are currently quoting at attractive levels and have dividend yields in the range of 3.5-6 %. However, dividend yield, in isolation , is not a useful investment tool. At best, it could help identify a set of stocks from which one can pick and choose for the portfolio.
Other parameters , like book value, P/E ratio and growth prospects of the company , are also analysed by investors before taking a bet as many stocks, especially in mid-caps and smallcaps do not pay high dividends but generate favourable returns. "High dividend yielding stocks may not necessarily be the best way to choose stocks, because there have been instances when the company has gone bankrupt after giving high yields," said Raamdeo Aggarwal, Joint MD, Motilal Oswal Financial Services.
So, it is important that investors look at it in conjunction with future business prospects and cash flows of the company, he added. However, if the dividend yields sustain then investors will definitely be rewarded handsomely, he said.

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