In the good old pre-rollercoaster days, 'returns' from stocks usually meant dividends-the literal 'share' of the company's distributed profits-rather than quick gains from capital appreciation. That investors are talking about dividend yields again is a sign of a return to good sense.

But what, anyway, is dividend yield? It is the latest annual dividend, divided by the current share price. If a company pays a dividend of Rs 10 per share for the last financial year (often announced as a '100 per cent' dividend on a share of face value Rs 10), and currently trades at Rs 100, the stock's yield would be 10 per cent.

What It Means

Assuming that the following year's dividend would be the same, the yield indicates the return in percentage terms that you can expect to get over the year, purely from dividends, if you were to buy the stock now-whether or not you intend to sell it after getting your cheque.

While investing in stocks for dividends is seen as a defensive investing strategy, the fact is that when other investment returns fall, it is a jolly smart thing to do, especially for retail investors who cannot hope to time the market's ups and downs well enough to play a capital appreciation game.

As circumstances would have it, interest returns on debt instruments have been on the decline, and dividend yields have been on the ascendant, overtaking bond yields in many cases.

In other words, it makes sense to look out for high-yield stocks, especially of those companies that face low uncertainties on the profit front. The other good news is that high-yield stocks tend to lead market rallies, as their very dividend juiciness attracts a swarm of buyers. So, other things being the same, their market prices are likely to rise, too.

Part Of The Rally

"The high dividend yields have definitely been one of the triggers for the current rally, which is expected to continue with minor corrections," says Nikhil Mehta, Chief Executive Officer, Basic Financial Services. "The fresh inflow of investible funds is moving away from debt into equity since debt markets are subdued at the present moment," Mehta adds. Bond yields worldwide have been on a downward trend, which typically ignites investor interest in high-yield stocks.

In India, too, the same pattern is being followed. The yield on the benchmark 10-year Government bond has halved to 5.75 per cent over the past three years. Several strong stocks currently give dividend yields that exceed this yardstick.

Most exciting of all, stock investors don't need to pay tax on dividends earned from this year. A caveat for investors: the investment risks tend to be different when you invest in bank deposits and dividend yield stocks. Simply put, every company is not equally safe as a bet.

Safe Investments

The biggest thing in the favour of high-yield stocks, at least those of the more reliable companies, is that they are attractive to the safety oriented investor as well.

The short-term risks of stocks are related mainly to the movement of prices, which remain volatile. "In case the company's stock price dwindles, the dividend still remains," says Mehta. Moreover, it is a rare phenomenon for dividend yields to match up to or even outshine debt yields. So buy the good stocks when their prices dip, and you will not regret it.