Dividend stocks - Do they matter?

Interesting in dividend stocks seems to have gone out of fashion over
the last few years.

We came across this interesting article recently on India Infoline (http://www.indiainfoline.com/news/innernews.asp?storyId=76882&lmn=1&cat= 26). They analyze the top 25 dividend yielding stocks and conclude that most of them are
'Value Traps' - these stocks may give strong dividends, but may suffer from price erosion.

This is because of earnings pressures going forward. The analysis has selected the top dividend yielding companies from groups of different market capitalization. Due to capital erosion, these stocks may not yield good results even in a bear market.

This raises a fundamental question - do dividend stocks merit a place in your portfolio?. We feel they do for the following reasons:

Earnings visibility - While companies giving high dividend yields also face earnings pressures, that is applicable in general to the entire market. In fact, these stocks tend to have relatively stable earnings streams as compared to the rest of the market

Low beta - Dividend stocks tend to trade in a narrow band and are less prone to a fall even in volatile market. In calendar year 2008 stocks like TNPL, Ador Fontech, Varun Shipping have had lesser fall as compared to other stocks

Stable cash flows - they have stable cash flows and do not have a heavy interest burden. This ensures adequate interest coverage in times of rising interest rates.

Tax efficient - Dividends are tax free for the investor. Even after considering the dividend distribution tax paid by the company, it Is still efficient for the investor from an annual earnings viewpoint

Dividend history - Stocks with a dividend track record have proven
their ability to pay dividends through business cycles. For e.g. companies from the Shriram group have paid dividends over the past twenty years.

In the current market we feel that defensive stocks like TNPL and Ador Welding have a role to play in Investor's portfolio. They cap your downside and provide assured income as well. That is more than can be said for several large cap 'growth' stocks.