Are Dividend Stocks a Better Bet During a Bear Market?

Companies that pay high dividends are generally mature companies with less reinvestment needs and steady cash flows. The important metric when evaluating a dividend-paying stock is the ‘dividend yield’. The dividend yield is calculated by dividing the annual dividend per share by your current market share. For example, if the annual dividend on stock ‘X’ is $10 and shares are listed on $300, then the dividend yield on stock ‘X’ is 3.3%. Based on data from previous years, these companies tend to outperform other stocks during bear markets. For example, during the last couple of bearish phases in India, the Nifty Dividend Opportunities 50 Index outperformed the large cap indices (Nifty 50, Nifty 100) as well as the broader market indices (Nifty 500) for the most part. weather.

Nitin Shanbhag, Executive Group Senior Vice President, Investment Products, Motilal Oswal Private Wealth, said: “In addition to providing a consistent dividend yield, many dividend-paying stocks are typically part of defensive sectors that are likely to face greater volatility and an economic recession. better than cyclical sectors” and therefore outperform during bear markets. As of April 29, the Nifty Dividend Index is comprised primarily of companies in the IT and FMCG sectors, which are defensive in nature. Oil and Gas, Construction and Mining Companies Sectors that include PSU companies also make up a good portion of the index.

“Companies that don’t need their profits and return them to shareholders according to a clear payout policy are definitely safe haven stocks. In bear markets, they provide a safety net and are also likely to offer an opportunity for price increases when money is chasing safety,” said Shyam Shekar, founder of i Thought Financial Consulting LLP. Income instruments may not be a good idea. Dividends are variable, whereas interest on fixed bonds or deposits is safe, with only the risk of default. Also, in India, dividend yields are not very attractive compared to yields on, say , the traditional fixed deposits, which are a safer option than shares”. In India, except in very rare cases, the average dividend yield was between 1% and 3.5% in the last 30-40 years. This is different from what we see in developed economies. like the United States, where according to previous data, dividend yields are higher than bank deposits,” said Tanushree Banerjee, co-head of research at Equitymaster.

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Dividend-earning stocks may also underperform when the market recovers or during a bull market when investors prefer growth stocks more. Also, dividends are not a very tax-efficient way of earning returns. Dividends earned by an investor are taxable at their slab rate (applicable TDS). But returns in the form of capital appreciation on a stock attract a 10% capital gains tax on top $1 lakh sold after a holding period of 1 year.

When selecting dividend-paying stocks, a higher dividend yield with a consistent dividend payout policy is preferred. “When a company has a higher dividend yield, it usually means that company valuations are not very expensive,” Banerjee said. This can be seen in the graph that shows the inverse relationship between valuations (represented by the price-earnings ratio) and dividend yields. “Currently, dividend yields are higher than average, but not like a bear market,” Banerjee added. “It’s always a good time to invest when dividend yields rise on such stocks,” said Shekhar of i Thought Financial Consulting. Having said that, experts also caution investors against selecting stocks based on dividend yields alone, as many variables affect this metric.

Dividend Yield Funds

You can also consider taking exposure to dividend companies through dividend yield funds, which invest at least 65% of total assets in dividend-earning stocks. There are five dividend yield funds with a track record of at least 5 years. However, the performance of most of these funds has not been very impressive. Only Templeton India Equity Income Fund was able to outperform the benchmark, the Nifty Dividend Opportunities 50 TRI Index (Tier 1), in both the short and long timeframes. Note that dividend yield funds are not the same as dividend option (income distribution with option to withdraw capital) mutual fund schemes, under which investment earnings are periodically redistributed to shareholders. participants. If you choose the “growth” option of a dividend yield fund, the fund will reinvest dividends earned on investments. Dividend yield funds are also tax efficient, as earnings are taxed as capital gains at the time of redemption.

conclusion

Exposure to dividend-earning stocks should be considered for downside protection rather than maximizing returns or regular income. Also, take into account the taxation of dividends (at the slab rate). Dividend yield funds are more tax efficient, but have not had a good track record of outperforming benchmarks.

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