When markets witness a correction, investors are suggested to explore safer avenues. One of such options is dividend yield mutual funds which are equity schemes that invest a minimum of 65 percent of their money in high dividend-yield stocks.
When the markets are uncertain, retail investors tend to shift to the profit-making companies that boast of strong balance sheets such as dividend yield stocks which generally (and not necessarily always) have sound balance sheets and generate cash consistently.
Chokkalingam G, Founder, Equinomics Research and Advisory tells MintGenie, “During the current market phase, investors can consider high dividend stocks and funds seriously. Although these funds can also decline when the entire market is declining but after a certain point, they won’t crash.”
He cites the example of a high dividend-yield stock which, he says, fell only in the range of 4 to 5 percent in the past two months, while offering a dividend of 7-8 percent at the same time. Consequently, investors wouldn’t be inclined to sell the scrip despite the fall.
“What works in the case of dividend yield stocks is that fewer investors book losses, particularly when the yield is 7-8 percent. One may say that this return is more than what a bank would offer in form of interest on the money you would receive if you book losses during the market fall,” he says.
Deepak Aggarwal, Delhi-based financial advisor and chartered accountant, also echoes the same sentiments. “Some investors see dividend yield funds as a hedge against volatility and invest into them with an intent to inject stability in their portfolios,” he says.
Another advantage that these funds offer is that investors are not supposed to pay tax on the dividend received since fund houses reinvest them, thus helping the fund swell further by the power of compounding.
In contrast, dividend received on dividend yield stocks is taxable in the hands of investors.
However, not all feel equally optimistic about the dividend yield funds.
S Sridharan, founder and principal officer, Wealth Ladder Direct, says, “Although some PSU stocks come in this category (of high dividend yield), but the trend of paying high dividend may not continue for long even by them.”
He attributes his apprehension to lower investments made by the companies during the current phase of high inflation and rising interest rates. “High dividend is the direct result of investment made. When companies don’t make fresh investments, there wouldn’t be high dividend — at least not after too long,” he says.
Returns by top dividend yield funds
In the past one year, some high paying dividend yield funds have posted as high as 21 percent direct returns.
According to the AMFI data, as on May 31, 2022, ICICI Prudential Dividend Yield Equity Fund gave a return of 21.49 percent.
HDFC Dividend Yield Fund gave a return of 19 percent, and Templeton India Equity Income Fund gave a return of 21.65 percent.
| Dividend yield funds | Return (%) |
| Templeton India Equity Income | 21.65 |
| ICICI Prudential Dividend Yield Fund | 21.49 |
| HDFC Dividend Yield Fund | 19 |
| Sundaram Dividend Yield Fund | 9.82 |
| Tata Dividend Yield fund | 7.42 |
| IDBI Dividend Yield Fund | 7.04 |
(Source: AMFI; direct returns as on May 31, 2022)
Some of these income-bearing mutual funds gave returns in single digits too. For instance, IDBI Dividend Yield Fund posted a return of 7.04 percent, Sundaram Dividend Yield Fund gave a return of 9.82 percent and Tata Dividend Yield fund gave a return of 7.42 percent.
