In the US and other European countries, utility stocks are high dividend yield stocks and they are preferred by retired people seeking regular and assured income that is tax efficient. That is why these stocks are also popularly known as Income Stocks. These are stocks where the dividend yield (Dividend per share / Market Price) is attractive. Normally, a dividend yield of above 6% makes the stock an attractive proposition as dividends are tax-free and hence the post-tax yield is much higher. The attractive dividend yield acts as a kind of a price support for the stock, which limits its downside risk. Investors who want steady income can look at these stocks. However dividend yield stocks are not known to outperform in price terms.

There are few basic things about dividend yield that you need to be familiar with. Firstly, dividends are tax free in the hands of the investor up to Rs.1 million each year but dividends payments are subject to 15% dividend distribution tax (DDT). So if the company declares a dividend of Rs.100 then the investor only gets Rs.85 approx (we have ignored surcharge and cess for simplicity). Secondly, when stocks pay high dividends they are seen by the markets as companies that do not have too many investment and expansion opportunities. Hence such dividend yield stocks normally tend to have a very unattractive P/E ratio.