Investing In High Dividend Yielding Stocks & Mutual Funds | Bear Market Investing Strategies



Stocks or mutual funds have two sources of returns:

Firstly, there is the expected appreciation in the stock price and then of course, there are dividends. So 50, 60 years back dividends were a big deal and stocks would often offer dividend yields averaging a good 6% per annum

But over time, this policy has become a lot more diverse with companies offering high dividends, low dividends and even no dividends. Now for an optimist a dividend stock offers the best of both worlds i.e. one gets upfront cash and then there is potentially an upside in the form of stock price appreciation.

In the same way, for a pessimist investor dividend-yielding stocks acts as defensive instruments that provide some comfort especially during stock market declines.

With India and the world facing one such decline now in this video, we shall study some related data and see if a shift towards higher dividend-yielding stocks, ETFs and mutual funds can be an investorโ€™s answer to better tackling this somewhat uncertain equity market.

๐Ÿ“ CHAPTERS

00:00 Introduction
01:22 Why dividends matter and why they don’t?
02:49 Bear markets and dividend yielding instruments
08:21 Dividend yielding mutual funds
10:41 Advanced strategies

๐Ÿ“ WHY DIVIDENDS MATTER AND WHY THEY DONโ€™T?

There is a high degree of debate surrounding the question

โ€œDoes paying a high dividend make a company a more attractive investment?โ€

So, firstly there is the economic argument that says the most efficient and strong companies can increase total shareholder returns by offering a low or no dividend and by reinvesting the excess cash in growth assets like plants, people, R&D, products, technology etc. which further compounds capital

Secondly, we have the gratification factor and studies have shown that a little money in your pocket, however unnecessary, is likely to give you more joy which is the part that dividends play inspite of being tax inefficient

Thirdly, there is the perception argument wherein the markets extrapolate a dividend as a price appreciation signal and a sign of better cashflows and business optimism

And finally there is the premise and I truly support this one which says that some managers cannot be trusted with cash which is another way of saying that competent managers who allocate capital well are an exception in the business world

So as one can see, there are multiple angles to how dividends make their presence felt and a lot of it becomes even more visible and important during bear markets

๐Ÿ“ BEAR MARKETS AND HIGH DIVIDEND-YIELDING INSTRUMENTS

The last prolonged bear market we all saw globally was in the 2008 to 2010 period when the effects of the Global Financial Crisis were at its peak. The point is dividend yields are uncertain they are sometimes unsustainable and one needs to also factor the lifecycle of the business as itโ€™s generally the mature or declining businesses that end up offering a high dividend yield.

๐Ÿ“ DIVIDEND YIELD MUTUAL FUNDS

Mutual funds have a category called the dividend yield funds and the primary goal of this category is to identify and invest in companies that offer higher-than-benchmark dividend yields

So speaking of a benchmark the Nifty50 or for that matter, the Nifty 500 operates at a dividend yield range of 1 to 1.5% at most times which is not much but is still a starting point

Now, per the contours prescribed by the Securities and Exchange Board of India these funds have to invest at least 65% of their assets in dividend-yielding stocks but surprisingly, the regulator has not prescribed any minimum level of yield that is needed for a stock to qualify

This effectively gives fund managers a lot of flexibility which they definitely utilize to invest in companies that either donโ€™t pay a dividend or pay low dividend

๐Ÿ“ ADVANCED STRATEGIES

A fair chunk of investors are gravitating towards high dividend yielding stocks as it adds more stability to their portfolio and also acts as a volatility hedge

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