Falling market a golden chance to pick up high dividend yield stocks

Now is a good time to invest in some quality high dividend yield stocks, notes a report published in the Economic Times Wealthtoday,because this is the time when companies start paying dividends. Also, since the markets are volatile, this old trick of the book might just be what the doctor ordered.

Dividend yield is a tool by which you can measure your returns from a stock. Dividend yield is calculated by dividing annual dividend payout by the share price. For example, if the dividend is Rs 5 and the share price is Rs 20, dividend yield is 25 percent. So, lower the stock price higher the yield.

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In the current downbeat market conditions, several large-caps are available cheap, and hence dividend yields will be high. In fact, this strategy also works for those who are here to invest with a long-term goal. Not only do such stocks give you fairly regular dividends, here the capital appreciation is also fairly good.

But keep in mind that this strategy works only when the market is down and stock prices are falling. The added benefit is that dividend is tax free.

However, when picking up stocks, one has to be remember that lower stock prices can be for various reasons. In other words, spotting a good stock for this strategy can be tricky. Apart from stock price, you should look at other parameters as well. If the stock price decline is due to due to falling profitability, you may be entering a trap as dividends will surely dry up going forward. Moreover,high dividend could also be a one-off.

So, pick up the stocks wisely. Ensure the company has paid out dividends regularly at least for four-five years. Another parameter to look into is a high payout ratio on the company's books. One more option is to buy a stock which has just declared a dividend. In this case, you will miss the dividend opportunity now, but the stock is available at a lower price.

PSU stocks are usually considered as high dividends payers.

"At a time when growth companies are not offering good dividend yield, PSUs provide a hiding place. But buy only those trading at a pricebook value of less than 1," Kartik Mehta, vice-president, research, institutional equities, Sushil Finance,has been quoted as saying in the theET Wealthreport.

Price-to-book value helps an investor understand whether a stock is undervalued. A lower PB ratio means the stock is undervalued, according to Investopedia.

He is of the opinion that NMDC, IDBI Bank, Power Finance Corporation, REC, Bank of India and Punjab National Bank are sound long-term bets.

Read the entireET Wealth report here.