Dividend yield funds

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I wish there was a different label for this mutual fund type. When one sees ‘dividend yield’ as part of the fund’s nomenclature, it’s understandably assumed that regular dividends are given to investors. This, however, isn’t accurate whatsoever. A dividend yield (or any other) fund isn’t bound to issue payments to its investors.

 

The name ‘dividend yield fund’ reflects the strategy it follows. This involves investing in firms that consistently offer significant payouts.

 

Dividend yield = Dividend paid during the year/ stock price

 

If Infosys is trading at Rs.780/- per share and it pays a dividend of Rs.22/- for the year, the company’s dividend yield would be calculated as such.

 

= 22/780

 

= 2.8%

 

Here’s SEBI’s definition for the category-

 

 

Most of the fund is placed in stocks that give out dividends. This has two main benefits

 

The fund invests 65% of the corpus in stocks that provide dividends; the remaining 35% can be used to invest in non-dividend paying stocks.

 

Ideally, these funds should invest in stocks offering high dividends. However, a lack of clear definition regarding what ‘high dividend’ entails can lead to discrepancies when it comes to stock selection. For instance, one fund manager may view any yield over 0.75% as ‘high’, while another could use the dividend yield of indices as their benchmark.

 

For example, check out the UTI Dividend yield fund –

 

The fund has a portfolio of firms that have been established and are consistently paying dividends, benchmarked against the Nifty Dividend opportunity 50 indices.

 

 

In the last decade, here’s how the dividend yield funds have generated returns-

 

 

It’s evident that these funds are performing at a standard level.

 

I’m not so keen on dividend yield funds. I’d rather take the chance with growth stocks, but ultimately it’s up to the investor and their portfolio goals.

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