IT stocks are beginning to offer bank FD-like dividend yields. But is that a trap for investors?

India's once-prized IT stocks are now beginning to pay dividend yields that rival a bank fixed deposit but that should worry you more than it comforts you. The top five IT companies now offer an average dividend yield of 4.9%, with Wipro at 5.7%, HCL Tech at 5.6%, TCS at 4.9%, Infosys at 4.7% and Tech Mahindra at 3.6%. These yields haven't climbed because companies are paying out more. They've climbed because the stocks have collapsed.

TCS, Wipro and LTIMindtree are all down at least 50% from their all-time peaks, and Nifty IT is languishing at multi-year lows. A falling stock price mechanically pushes the dividend yield higher and so what looks like an income opportunity is, at its root, a scoreboard of how much wealth has already been wiped out.

Bank FD interest vs dividend yields

For context, the yields are now inching closer to what banks pay on deposits. SBI offers 6.25% on a one-to-two-year fixed deposit, while HDFC Bank pays 6.25% on a 12-15 month tenure. For deposits till 364 days, interest rates vary in between 5.75% to 5.9%.

If shares of Tier-1 software services exporters fall further, yields could go up above 6% in select stocks. When stock prices plummet, high dividend yields naturally begin to act as a financial backstop, establishing a psychological floor for investors and capping further downside.

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For India's IT majors, this defensive moat is reinforced by massive balance-sheet liquidity. Sitting on substantial free cash flows, these companies are aggressively deploying cash through share buybacks. This dual-engine strategy of high dividend payouts and equity retirement creates a dual layer of structural support, effectively shielding the stocks from catastrophic drawdowns even amidst severe growth headwinds.

What should investors do?

Whether these safety nets can withstand a deeper structural shift is the multi-billion-dollar question, as the sector's current malaise goes far beyond a typical macroeconomic slowdown.

The pain traces back to an unusual convergence of forces. JPMorgan's Ankur Rudra describes India IT as facing an uncertain demand environment from an unprecedented confluence of technology and business cycle headwinds from GenAI-led deflation and geopolitics.

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Enterprises are gripped by fear, uncertainty and doubt as spending shifts toward AI tokens and cloud infrastructure, crowding out traditional tech services budgets and clouding the industry's growth recovery. The result: the sector has been stuck at just 2-3% revenue growth for three straight years, and with AI-led deflation still only in its second year, Rudra sees further headwinds ahead.

He has moderated his medium-to-long-term growth estimates for large-caps to 3-4%, well short of the mid-single digits many had hoped for, and reverse DCF checks have driven target P/E cuts of 10-25% across his coverage. He has downgraded HCL Tech, Wipro and Tata Technologies, arguing their declines still don't fully price in the risk ahead, while keeping TCS, Infosys, Tech Mahindra, Coforge, Persistent and Sagility as his top picks.

On TCS and Infosys specifically, he argues the business model isn't as broken as current valuations imply, and that the stocks now look attractive on P/E, dividend yield and free cash flow — all near decade lows in valuation, even as the payouts they represent look decade-high in yield.

How cheap are IT stocks now?

Data from DSP Mutual Fund shows that the top four largecap IT names trade at a 36% discount to their 10-year average P/E, yet still throw off a roughly 6.7% free cash flow yield and 5.7% shareholder yield, backed by net-cash balance sheets.

“The sector is no longer expensive. But a valuation bottom needs earnings visibility, not just lower multiples. Currently, earnings growth is absent. Firms and investors do not have the visibility of how earnings will shape up and at what pace. For Midcap IT, the growth challenge is lower,” DSP’s market strategist Sahil Kappor said.

On valuations, he admitted that the risk-reward appears significant, but growth challenges and business cycle present valid challenges.

The debate gets its first real test this week. TCS reports first-quarter results on July 9, kicking off an earnings season in which IT services firms are expected to post yet another quarter of muted growth, weighed down by client-specific issues, weakness in certain verticals, and continuing geopolitical uncertainty.

Not everyone is bracing for more losses, though. BNP Paribas' Kumar Rakesh points out that while sentiment on IT services has turned extremely bearish, there are early signs of capital rotating in from elsewhere as investors moving out of semiconductor stocks and into software.

The IGV US, an ETF tracking North American software stocks, is up roughly 28% from its 52-week lows even as leading semiconductor names are down 5-16% from their highs, a pattern Rakesh reads as a possible leading indicator that the worst of the bearish sentiment toward IT services may be behind it.

He also notes that most Indian IT firms have seen genuine improvement in return on equity and free cash flow generation since the pandemic, with several raising their payout ratios — which is exactly why the dividends look so generous now, and why they could act as a cushion in a further drawdown. Yet the ownership data tells its own story of retreat: foreign institutional investors' stake in Indian IT services has fallen to near all-time lows of 5.3% as of June 15, domestic institutional ownership has slipped to 6.2% as of May.

Analysts say valuations may limit further downside, but a genuine re-rating needs either an acceleration in growth or new commercial structures that let companies actually capture AI's value.

Morgan Stanley's Gaurav Rateria is among the most cautious voices in the debate. He frames the sector as living through a technology shift that brings a "transition period" of pain even in his base case, and warns that in his bear scenario, absolute revenues could actually decline in the near term — a scenario he assigns at least a 20% probability, one in which stocks could fall meaningfully even from today's beaten-down levels.

He expects growth over the next five years to run well below the pace of the last five, with an increasing share of that growth captured by in-house global capability centres rather than third-party IT vendors.

For now, Indian IT stands as the country’s most polarizing and high-stakes contra bet, a battleground where a handful of bulls continue to buy the dip as they wait to see if these historic dividend yields represent a solid rock bottom or merely a golden cage.