Dividend Yield Mutual Funds – Definition, Best Funds & Should You Invest in Them?

Last Updated : June 30, 2020, 6:19 p.m.

Dividends are a share of profit distributed among shareholders by companies. This has been a way of attracting investors and keeping them invested in the company’s stock by offering handsome and regular dividends. Many investors rely on these dividends for regular income from stocks. Let us understand the concept of dividend yield and dividend yield mutual funds better.

Top Mutual Funds to Invest in Now

What is Dividend Yield?

The dividend yield is calculated by dividing the dividend paid per unit by the market price of the stock. For e.g. a company pays INR 5 per unit/per share dividend and the stock price is INR 500, the dividend yield will be 1% (5/500*100). This means you make a 1% return from this stock in the form of dividends. If this stock moves from Rs 500 to Rs 550 in a year, the capital appreciation from this stock is 10% and the total return is 11% including the dividend yield.

There are some companies listed on the stock exchange which pay handsome dividends every year. These could be paid twice, thrice a year also. The dividend quantum and frequency depend on the cash, profits and future investment plans of the company. Such stocks having a high dividend yield are also called dividend yield stocks. Let us now understand dividend yield mutual funds.

What are Dividend Yield Mutual Funds?

These are open-ended equity funds that invest in dividend yield stocks or companies that have a high dividend yield. These funds declare daily NAV like all other funds and the dividend received from the company which is a part of this fund’s portfolio is reflected in the NAV. So, if the stocks in the portfolio pay higher dividends, the NAV will rise faster and vice versa.

Dividend yield funds, as per mandate, invest about 80-90% of the portfolio in high dividend yield stocks. However, the dividend yield is not the only criterion to pick stocks, the company’s financials, growth prospects, fundamentals and sector are also taken into consideration.

Many people confuse dividend yield mutual funds with the dividend option in mutual funds, let us understand the difference.

What is the Difference Between Dividend Option & Dividend Yield Funds?

Every mutual fund scheme (debt, equity, hybrid) has two options-dividend and growth. In the dividend option, dividends are declared and paid out to unitholders by the mutual fund. On the payment of this dividend, the NAV falls to that extent, so here dividend is not something extra or out of the mutual fund’s profit which is paid. It is just a tool to pay out some sort of regular income.

On the other hand, in the growth option, no dividend is paid and the NAV keeps on increasing or decreasing basis the fund’s performance.

Let us understand this better with an illustration.

You invest INR 10,000 in fund A’s growth option and another INR 10,000 in fund A’s dividend option. The NAV on the date of investment is Rs INR for both.

After 6 months, the NAV for both the options increases to INR 11. In the dividend option, the mutual fund decides to pay Rs 1 per unit as a dividend, so the NAV of the dividend option will now become Rs 10 (11-1) and Rs 1 per unit as a dividend will be credited to you.

On the other hand, dividend yield funds are a category of equity funds that invest in dividend yield stocks and have both growth and dividend as options in the fund. So, the concept of dividend and dividend yield mutual funds is completely different.

Let us now look at the three best performing dividend yield funds.

Best Performing Dividend Yield Funds

IDBI Dividend Yield Fund

This fund is offered by IDBI Mutual Fund. These are the key points to note about this fund:

• This fund was launched on 21st Dec 2018 and has returned 0.32% annualized returns since launch.
• The fund manages an AUM of INR 75 crores.
• The portfolio comprises 43 stocks with 51% in large-caps and 49% in mid and small-caps.

Principal Dividend Yield Fund

This fund is offered by Principal Mutual Fund . These are the key points to note about this fund:

• This fund was launched on 15th Oct 2004 and has returned 10.78% annualized returns since launch.
• The fund manages an AUM of INR 151 crores.
• The portfolio comprises 49 stocks with 68% in large-caps and 32% in mid and small-caps.

UTI Dividend Yield Fund

This fund is offered by UTI Mutual Fund . These are the key points to note about this fund:

• This fund was launched on 3rd May 2005 and has returned 12.57% annualized returns since launch.
• The fund manages an AUM of INR 1,972 crores.
• The portfolio comprises 47 stocks with 62% in large-caps and 38% in mid and small-caps.

Returns of Dividend Yield Funds

The table below shows the returns delivered by these funds in % terms in a regular plan.

*These returns are as on 29th June 2020

Should You Invest in Dividend Yield Funds?

These funds are suitable for conservative investors who want to take a lesser risk when investing in equity funds. This is because dividend yield funds invest in stable companies, mostly PSUs that have a high dividend yield. This makes the portfolio quality good. Also, these funds are a good option for investors who invest directly in dividend yield stocks looking for high dividends. We say so because dividends from stocks are now taxed as per an individual’s tax slab. So, if you are in the highest tax bracket you will have to pay a hefty 42% tax. You can invest in the growth option of dividend yield funds which will serve the same purpose.

These funds perform well when the markets are in a downward trend, they fall less as compared to other high growth-oriented equity funds. But in a rising market, these funds will not do as well as other equity funds. If you are looking for growth-oriented equity mutual funds, multi-cap funds are the best option.

To know more about multi-cap funds and the best multi-cap funds you can read another post of ours- https://www.wishfin.com/mutual-fund/five-best-performing-multi-cap-funds-to-invest-in/