scorecardresearchDividend yield funds: Do they assure safety against price fluctuation?

Dividend yield funds: Do they assure safety against price fluctuation?

Updated: 28 Mar 2022, 06:16 PM IST
TL;DR.

These funds performed well during two years of pandemic, say financial experts

The dividend yield ratio indicates how much a company pays out in form of dividends every year in relation to its stock price.

The dividend yield ratio indicates how much a company pays out in form of dividends every year in relation to its stock price.

Dividend yield funds that primarily invest in dividend yielding stocks as category have outperformed large cap funds in past one year. These funds usually have a low downside, and are sometimes seen as a good choice for investors during volatile times. Ever since Russia's invasion of Ukraine on February 24, financial markets in India — just as anywhere in the world — have witnessed wild volatility.

This brings to fore the need to explore stocks and funds, which are robust enough to weather any storm with least fluctuation in prices.

ALSO READ: Asset allocation amid volatility: Here's what to do with your equity, gold, debt

Experts say that the returns posted by dividend yield funds have been good during the pandemic, which prompted investors to see these stocks as a protection against volatility.

“Returns for dividend yield funds for past one to two years have been phenomenal. During volatility, steady companies with high cash flow may provide good dividend. Also, these funds have performed quit well in past two years of pandemic because of their exposure to government enterprises, which spent more unlike private entities,” says S Sridharan, founder and principal officer, Wealth Ladder Direct.

However, Mr Sridharan cautions that this may not continue forever. “Going forward, the past returns may not indicate future performance. So, one shouldn’t choose them over large cap funds only because of their past performance.”

In fact, the financial ratio of dividend yield indicates how much a company pays out in form of dividends every year relative to its stock price. A high ratio means good cash flow in business and also company’s commitment towards shareholders. When the markets are volatile, high dividend paying stocks are seen as safe haven.

These funds invest a minimum of 65 per cent of the portfolio in dividend yielding stocks.

 

These are the returns posted by dividend yield funds in past one year

Fund    1-year-return (in %)
Aditya Birla Sun Life Dividend Yield Fund  26.74
HDFC Dividend Yield Fund  28.95
ICICI Prudential Dividend Yield Equity Fund 34.48
IDBI Dividend Yield Fund21.75
Sundaram Dividend Yield Fund         19.95
Templeton India Equity Income Fund30.90   
UTI Dividend Yield Fund      25.31

(Returns are direct as on Feb 28, 2022; Source: AMFI)

 

The one year returns posted by these funds range between 19.95 percent to 34.48 percent per annum. Sundaram Dividend Yield Fund posted nearly 20 percent return, slightly lower than the benchmark’s return of 23.38 percent.

At the same time, Templeton India Equity Income Fund posted 30.90 percent return, while the benchmark return was far lower at 23.38 percent.

Similarly, IDBI Dividend Yield Fund posted 21.75 percent return in one year, ICICI Prudential Dividend Yield Equity Fund gave 34.48 percent return, HDFC Dividend Yield Fund posted 28.95 percent, and UTI Fund reported 25.31 percent return.

Amol Joshi, Founder of PlanRupee Investment Services, has a word of caution for small investors. “Just as other funds, dividend yield funds sometimes under-perform and sometimes they outperform. Traditionally, they were seen as schemes wherein some amount of income gets accrued regardless of stock prices rising or falling, which would prevent investors from selling the stocks. Besides that, they don’t offer any specific advantage over large cap funds.”

He further adds, “Moreover, even if dividend is given by companies, the fund house may or may not give exactly the same amount of return to its investors.”

So, it is advisable for small investors to evaluate both sides of the coin before investing their hard-earned money in any category of funds, including dividend yield funds.

 

First Published: 28 Mar 2022, 06:16 PM IST