Is it time to opt for the dividend option?

The steep crash in the markets over the past week would have investors extremely worried, sending them diving for safety.

While the weak-hearted will opt to stay out of the market, shrewd investors know there are ways to profit even in a falling market. One way of doing that is by looking at the dividend yield option. Investors can easily use dips in the markets to pick up stocks with a high dividend yield ratio. Punita Kumar Sinha, Managing partner of Pacific Paradigm Advisor, also advises to buy into high-dividend paying companies and to stay away from defensives.

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Simply put, the dividend yield of a company is calculated as annual dividend per share divided by the current market price of that share. The dividend yield of a stock changes as its price changes. When the share price falls, the dividend yield increases and vice-versa.

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In a falling market, stocks with a high dividend yield can be a good investment. Still, investors need to take care - not all high-dividend-yield stocks are winners.

A very high dividend yield can also be a warning sign. That’s because in this case, the share price is usually low, having been pummelled by investors for low growth prospects or other troubling reasons. For our analysis, we have taken companies from the BSE 500 index and have excluded companies that have made a loss in the March/Dec quarter.