Should You Consider Dividend Yield Investing In 2023?

As the new year starts off with a bang, there is one common question that most investors are grappling with – should they stick to their investment strategies or try something new? If you are also wondering about the best way forward, here is a suggestion you should consider. As an investor in equities, you already know that there are two ways to earn returns from your investments – capital appreciation and dividend income.

While there are many companies which reinvest their profits to sustain growth, a number of players across industries also offer a portion of their profits to shareholders, in the form of dividends. So, for 2023, should you consider dividend yield investing and turn your eye towards companies which offer high dividends?

Understanding Dividend Yield Investing
The term dividend yield investing refers to the strategy wherein you allocate a portion, or the entirety, of your corpus to companies which pay steady dividends. Such an investing strategy enables you to earn regular dividend income, in addition to the underlying capital appreciation witnessed by the shares of the company. 

Dividends are most frequently offered by larger and more mature companies which are focused on steady growth, as against newer companies which reinvest their profits to boost their growth rates. Therefore, when you go with a dividend yield strategy, your capital appreciation may be lower than that being exhibited by leaner and younger companies.

The dividend yield you receive is similar to the interest your bank deposits earn though, in most cases, the former is likely to be much higher than the latter. Dividend yield is expressed in the form of a percentage and can be calculated by dividing the dividend by the price of the share, and then multiplying it by 100. 

In simple terms, dividend yield refers to the percentage a company pays out each year, in the form of dividends, relative to its stock price. In India, typically, many public sector companies pay high dividends.

Benefits You Should Be Aware Of
Now that you know what dividend yield investing means, what are some of the pros and cons of this strategy? In terms of its advantages, dividend yield investing enables you to earn a regular income, in addition to capital appreciation. It can be a great option for retirees who do not have a fixed pension or wish to supplement their pension optimally. 

Separately, you also have the option of reinvesting your dividend and purchasing more stocks of the company. Such a move would offer you the benefit of compounding interest. If you are investing for the long-term, and require a regular income during the course of investment, then dividend yield investing can be an effective option for you.

Cons of Dividend Yield Investing
The biggest disadvantage of investing in dividend yield companies revolves around the fact that these companies would, most commonly, be on a slow growth track. They offer heavy dividends because they are not reinvesting in growth and expansion, meaning that the potential for capital appreciation could be curtailed.

Further, historical dividend pay-outs cannot be considered the final word on future dividend yield potential. Companies have the right to change their dividend payout and structure based on internal decisions and management strategies. This means that you may not earn high dividends every year.

Should You Try Dividend Yield Investing?
While the strategy has both pros and cons, whether or not you should consider it in the new year depends on your investor profile. If you are a young investor keen on aggressive portfolio growth, then it makes sense for you to stick with high growth companies which reinvest their profits and focus on expanding their horizons. 

Alternatively, if you are preparing for retirement and need a steady source of income to sustain your requirements, then dividend yield investing could be an excellent bet.

If you do decide to opt for dividend yield investing, it is recommended that you do so through a dividend yield based mutual fund. 

Several fund houses have this offering. While choosing the fund, do remember to check the long term track record of the offering as stability in returns is very important here over long term.

By Sherry Mohan BM, Founder, Sarvada Wealth