High dividend yield stocks perform better as real interest rates fall: ICICI Securities

High dividend yielding stocks have been a very attractive segment due to the factors like rising global liquidity, declining fixed income yields and real interest rates. These stocks appear attractive because their yields are now comparable to other fixed income instruments and also have the added advantage of inflation hedge characteristics of stocks as an asset class, as said by ICICI securities brokerage firm.

ICICI Securities highlighted that the Nifty's price return CAGR has been 12.6 percent over the past 20 years, while total return (based on dividend reinvestment) has been 14.3 percent.

This extra return from reinvested dividends, as per the brokerage firm, is three times the original invested amount—Rs 10 lakh invested in January 1999 in the Nifty index has turned into Rs 37 lakh solely on the back of reinvestment of dividends, while capital appreciation gain is Rs 1.08 crore.

The brokerage said a look at rolling one-year returns indicates the bulk of the outperformance of the Nifty Dividend Opportunities 50 index was during the FY10-12 period when real yields remained negative persistently.

"Over the past one year, as interest rates continued to dip and inflation rose, the real interest rate has dipped into negative territory, which improves prospects for high dividend yield stocks," ICICI Securities said.

As per ICICI Securities, among the equity benchmark indices, the CPSE and the Dividend Opportunities 50 index have the highest dividend yields at 6 percent and 3.65 percent, while the lowest is offered by growth sectors 15 and the Bank Nifty at 0.99 percent and 0.4 percent, respectively.

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