As the rates globally plummet to new lows, with humble dividend-paying stocks rise to the top. In today's post, we discuss the various factors that help and hurt the prospects of the income builder theme.
Rate environment
Central banks world over are pushing rates down like there is no tomorrow. While this is a great reassurance to the market about the bank's intent to boost growth, it isn't very reassuring to folks seeking a stable place to park funds.
Pension funds looking for a stable place to park funds will increasingly find fewer instruments to make a safe consistent return. Folks in the older age brackets who are looking to move their portfolios away from an equity portfolio to a bond portfolio will increasingly find fewer sources to park their cash as rates fall to unsustainably low levels, especially when you look at them on a post-tax basis.
In such an environment, stocks with steady and growing cash flows who pay out consistent dividends could see increasing interest in the market.
Passthrough & Optically higher yields
A result of the move of taxation on dividends from the firm level to the investor level is that most firms are now thinking of passing through the saving on taxation to the shareholders. Dividends, and consequently dividend yields will, therefore, be at least optically higher.
The quality at any cost investor
One of the major challenges to the growth of the theme is the emergence of the 'quality at any cost' investor. Investors who have identified a set of companies with high-quality corporate governance, and consistent growth, and are piling on these stocks without a care in the world for the valuations they are trading at.
When the markets go southward these stocks and themes become even more popular, as investors lean towards the "safest" names. It increasingly looks like the theme is here to stay for a bit longer, which could make the switch to other themes a little tougher.
India's dividend stock composition
The other major challenge here is that a lot of India's high dividend-paying stocks are PSUs. Over time, for reasons right or wrong, a lot of investors have burnt their hands with the PSU stocks and as a result, are extremely hesitant to enter into these - irrespective of how cheap they have become.
It will be interesting to see how these forces play out in the times to come, and if the consistent dividend payers in the country could someday see their day in the sun.