X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Should You Consider Dividend Yield Funds Given The Turbulence Ahead? - Outside View by PersonalFN

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Should You Consider Dividend Yield Funds Given The Turbulence Ahead?
May 24, 2019

"If you want the recipe for getting rich in the stock market, here it is: Find stocks with above-average appreciation potential and safe and growing dividends and buy them at attractive prices." - Charles B. Carlson

Mutual funds have further simplified this job by offering you dividend yield funds. According to SEBI categorisation norms, any equity mutual fund scheme predominantly investing in dividend yielding stocks is classified as a dividend yield fund.

In practice, dividend yield funds not only invest in dividend yielding stocks, but they try to maximise the dividend yield by buying good dividend paying companies at cheap valuations.

But what dividend yield exactly means?

In layman terms it means, the return you earn by way of dividend in a year.

Dividend yield= Total annual dividend / Current stock price

Dividend yield falls when:

  • Total annual dividend amount falls
  • Stock price rises
  • Or dividends fall and the stock price rises

In some cases, the vice-a-versa is true.

Similarly, one can calculate the dividend yield for the entire index. By aggregating dividends of index constituents and dividing this aggregate by the index value.

Chart 1: PE Expansion making dividend yield unattractive

At present, the dividend yield of Nifty 50 index is just 1.11%. In fact, your balance in the savings bank account may fetch you higher returns. So, why you should even look at the Nifty dividend yield?

That's because fund managers do.

In most cases, the dividend yield of country's leading index serves as a guiding force to measure the attractiveness of dividend yield of individual stocks.

Moreover, you can determine the attractiveness of a stock's dividend yield by comparing the yield with the risk-free coupon on G-sec bonds When it comes to dividend income, it is deemed better when the difference in the long-term g-sec yields and stock's dividend yield is lower. .

Nonetheless, there isn't any hard and fast rule to decide on the attractiveness of a stock and its dividend yield.

Some typical traits of companies fetching higher dividend yields:

  • They are stable or low growth companies
  • Huge cash surplus but the management has no clue about how to utilise it effectively
  • Or possibly they don't need much cash to grow business
  • Promoter holds majority of stake and wishes to earn higher dividend income

You might wonder why you should invest in low growth companies?

Here're a few more traits which are often inconspicuous and thus go unnoticed frequently

  • Low growth companies usually have lower debt on their books
  • Fewer or no instances of promoter share pledging
  • Trade at reasonable or attractive valuations

These traits take high dividend yield stocks so close to value stocks.

But, there's a difference.

In value stocks, higher dividend yield isn't as pertinent a parameter as potential growth that does not reflect in prices. Against that, investors seeking only higher dividend yield might just focus on ensuring that the company should be able to sustain the current dividend payouts. That being said, growth isn't a critical parameter.

Therefore, it's possible that high dividend yield companies may have moderate or low potential to generate capital appreciation. And unless there's high visibility in earnings, there's always a threat that the high dividend payouts won't be sustained in the future.

If you are investing in dividend yield funds always remember the following points:

  • They might massively underperform when the market is betting on high growth or when markets are in the phase of P/E expansion.
  • Dividend yield funds might fetch relatively better returns under tough market conditions or when the P/E compression is on cards, given the obscure growth outlook.
  • If you expect dividend yield funds to outperform broader markets, then you must be prepared to stay invested for at least five years.
  • You should be wary of dividend yield funds investing excessively in mid-cap and small-cap stocks since dividend payout visibility is often low in small-sized companies.

'Attractive dividend yields' is a subjective term. SEBI classification norms also leave it to the prudence of the fund manager to decide what's an attractive yield, and rightly so. However, portfolios of two dividend yield funds might look completely different, depending on the preferences and the expectations of the fund house.

For instance, at present, UTI Dividend Yield Fund(G)-Direct Plan is betting high on Information Technology (IT) stocks and has allocated 30.6% of its assets to a single sector. Whereas, Templeton India Equity Income Fund(G)-Direct Plan holds just 5.8% of its assets in IT stocks.

It's equally important to know where a dividend yield fund invests in the absence of attractive dividend yield opportunities.

Now let's see how dividend yield funds have performed.

Table1: How attractive dividend yield funds are?
Scheme Name Returns Dividend yield (%)#
(Absolute %) CAGR (%)
1 Year 2 Years 3 Years 5 Years
Principal Dividend Yield Fund(G)-Direct Plan -1.4 7.4 16.7 12.7 1.41
Templeton India Equity Income Fund(G)-Direct Plan -5.9 4.2 12.2 12.6 2.04
ICICI Pru Dividend Yield Equity Fund(G)-Direct Plan -5.8 1.4 12.9 11.2 2.78
UTI Dividend Yield Fund(G)-Direct Plan -0.4 5.1 12.3 10.4 2.4
Aditya Birla SL Dividend Yield Fund(G)-Direct Plan -10.8 -4.3 6.6 8.1 2.18
NIFTY 50 - TRI 8.2 10.9 14.6 11 -
S&P BSE SENSEX - TRI 9.3 12.6 15.2 11 -
#Dividend yield as per portfolios disclosed on April 30, 2019
Return data as on May 17, 2019
(Source: Ace MF)

Should you invest in dividend yield funds now?

At a time when the market is trading at significantly high valuations, finding attractive stocks with high dividend yields has become a challenge for fund managers. If you want to invest in dividend yield funds, opt for the ones with a proven track record.

You should invest in them through Systematic Investment Plans (SIPs) and prefer direct plans to optimise gains. Before you invest in mutual funds, remember to consider your financial goals and risk appetite.

Editor's note:

Our premium mutual fund research service FundSelect Plus underwent a major overhaul (as demanded by our research team) and it looks more powerful than ever.

Focusing on new-age investment strategies, instead of mere portfolios, it aims to provide you with an all-in-one investment solution to achieve almost EVERY financial goal.

Comprised of SEVEN investment strategies (added with FREE bonuses worth in thousands), this is probably the best investment you could make.

Right now, we are giving it away at a HUGE 50% discount.

Want to start building your financial future today itself?

Click here to know more.

Author: PersonalFN Content & Research Team

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Equitymaster requests your view! Post a comment on "Should You Consider Dividend Yield Funds Given The Turbulence Ahead?". Click here!

  

More Views on News

Will Shriram Balanced Advantage Fund's Dynamic Approach Help You Rid-off Market Volatility? (Outside View)

Jun 24, 2019

PersonalFN briefly shares its views based on Shriram Balanced Advantage Fund based on the outlook and analysing the NFO.

Gold Is Rising. Should You Be Happy? (Fast Profits Daily)

Jun 24, 2019

Gold is rising but it's not a cause for cheer.

Three Words for a Sound Investing Strategy (Profit Hunter)

Jun 24, 2019

Do you think stock markets are risky? Is the smallcap volatility leaving you anxious. Read on to find out how to minimise risk and maximise returns with a simple framework.

Caution! The Great Indian Clean-Up Is Underway (The 5 Minute Wrapup)

Jun 24, 2019

Do you believe that Modi 2.0 will be successful in clearing the economic mess and steering India to the path of growth and progress?

Why Portfolio Characteristics Of A Mutual Fund Are Very Important (Outside View)

Jun 21, 2019

Investors and investment advisers would be better off if they pay close attention to the portfolio characteristics discussed in this article at the time of scheme selection.

More Views on News

Most Popular

7 Stocks That Will Remain Evergreen in this Era of Technological Disruption(The 5 Minute Wrapup)

Jun 13, 2019

We are living in an era of disruption. Are your stocks well equipped to adapt to changes that disruption will bring along?

Kenneth Andrade Would Like Our Real Estate Stock Recommendation with Triple Digit Upside(The 5 Minute Wrapup)

Jun 12, 2019

This real estate stock recommended in Smart Money Secrets offers the most favourable upside potential.

Why I Believe Smallcaps Will Catch up to the Sensex(Profit Hunter)

Jun 14, 2019

Smallcaps have gone nowhere even as the Sensex makes new all-time highs. Find out why Richa believes this a good opportunity to invest in smallcaps.

Why Super Investor Kenneth Andrade is Bullish on Agri Stocks...and So Are We(The 5 Minute Wrapup)

Jun 21, 2019

Andrade gives his take on agriculture, an industry from which we have already recommended two stocks.

7 Bluechips to Profit from Tech Disruption(Profit Hunter)

Jun 17, 2019

We are living in an era of disruption. Are your stocks well equipped to adapt to changes that disruption will bring along?

More

Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms

S&P BSE SENSEX


Jun 24, 2019 (Close)

MARKET STATS