For retirees and investors looking to build a steady income stream from their investments, dividend-paying stocks have long been a popular choice. But financial planners say investors should look beyond headline dividend yields and consider tax efficiency, payout certainty and capital preservation before deciding where to park their money.
According to Mohit Gang, Co-Founder and CEO of Moneyfront, dividend-paying stocks continue to have their place in an income portfolio, particularly after the correction in sectors such as IT.
"IT stocks... because of the immense cash on their balance sheets and the way they have got hammered down in the market, the dividend yields are looking very, very attractive," Gang said. He added that PSU companies, select FMCG firms and commodity names also continue to be reliable dividend payers.
However, he cautioned that dividend investing has its limitations. "Dividend in the hands of investors is fully taxable at the marginal slab rate. Even if you're selecting a stock which gives you a 6% yield, the in-hand yield is only 4%," he said. Dividend payouts are also irregular and depend on company performance, making them unsuitable as the sole source of retirement income.
Gang is even more critical of the Income Distribution cum Capital Withdrawal (IDCW) option offered by mutual funds. "IDCW is no longer a preferred choice," he said, noting that payouts reduce a fund's net asset value while the entire amount received is taxed at the investor's slab rate.
Instead, he recommends Systematic Withdrawal Plans (SWPs). "An IDCW option vis-Ã -vis an SWP is never a feasible option," Gang said. Under an SWP, only the capital gains portion of each withdrawal is taxed, while the invested capital is returned tax-free. "You're not getting fully taxed on the amount being withdrawn," he explained, making SWPs significantly more tax-efficient for long-term investors.
Gang also highlighted REITs and InvITs as compelling alternatives for those seeking predictable income. "It's a fantastic option... a very efficient mechanism with consistent regularity in income," he said. By regulation, REITs and InvITs distribute 90% of their cash flows to investors, providing relatively stable payouts alongside potential capital appreciation.
For investors prioritising certainty over returns, fixed deposits, government savings schemes and high-quality bonds remain viable options. But Gang says no single product is ideal for every retiree, and the focus should be on post-tax returns, consistency of income and overall portfolio diversification.
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