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Synopsis
Stock price and dividend yields have an inverse relationship. But before this inverse relationship kicks in, there is a level of equilibrium. Now this equilibrium level is subjective, and moves in tandem with the risk-free interest rate which an FD provides. Now, there is another equilibrium level which mathematical equations don’t solve. Consider stocks with a reasonable probability of outperforming in a bearish market. The use of the word reasonable brings in the subjective element. With interest rates on FDs hovering above 7%, buying a stock with a 7-8% dividend yield may not appear the best decision. Investing in stocks where the yield is not even 5% would seem foolish. But, if a dividend of 4-5% percent is combined with a reasonable probability of outperformance in a volatile market, it may be worthwhile to have these stocks on a watchlist.
When it comes to investing on the basis of high dividend yield, it is PSU stocks that have topped the list. But then came the rally in the PSU space and it was not about dividend yield, but capital gains. But the fact is that dividend yield will act as cushion as investors chase capital gains. A stock which is currently available at a dividend yield of close to 5% is not bad for an investor who is keen to have some margin of safety at a time
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