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Best Dividend Yield Funds

Dividend Yield Funds is a type of mutual fund scheme which is used to make investments in company stocks and shares that pay dividends. Dividends are a part of profit that a company shares with its shareholders. Dividend Yield mutual funds focus on investing in such companies that have substantial history of profits and therefore, pay high dividends in return. Hence, Dividend Yield Funds invest on high-quality company stocks that have a consistent profit record.

Dividend Yield showcases the company’s paid dividends in the span of a year. It is (the yield) shown as a percentage and not as the actual amount. It helps in viewing the return per amount invested through dividends by the shareholders. It is seen that investors commonly mistake Dividend Yield Funds for funds that pay high dividends. On the contrary, these funds come under Mutual Funds wherein the major portion of the corpus goes into dividend yielding stocks for above average returns, i.e., investing in stocks that pay an above-average dividend regularly. But, the investment trend with dividend yield fund is of investment on its corpus in stocks that have a dividend yield higher than the average dividend yield in the market. It is considered substantially high if it is higher than Nifty 50 or the Sensex.

These funds are less volatile because their average returns are lower and are consistent unlike large-cap and multi-cap stocks that are unpredictable and have a faster growth. According to the standards of SEBI (Securities and Exchange Board of India), the dividend yield fund schemes should invest a minimum of 65% of its assets as equities (in dividend yielding stocks).

Benefits of Investing in Best Dividend Yield Funds

Dividend funds, as discussed before, are mutual funds that invest in company stocks in return for dividends (the profit it makes).

  • Lesser Risks: These investments are less risky because they tend to have a stable cash flow. These companies usually don’t reduce their dividends either. Furthermore, they are less aggressive as compared to other growth stock mutual funds.
  • Steady income: Dividends are usually considered a source of passive income which can further be used to purchase more stocks of mutual funds. They are less aggressive and are a source of steady income because of this.
  • Protected against Inflations: These funds, unlike growth funds, have a settling stage after which they don’t decline. These dividend yields then act as barriers to a further decline in funds beyond a point.
  • Dividend Value: They have price-to-earnings ratio or price-to-book value ratios that show the inexpensive segment of the market.

Difference between Dividend Yield and Dividend Option

Dividend Yield funds are often confused with dividend options of mutual funds, but they are different. Let us understand how:

  • Dividend option is when an investor agrees to receive the returns of the mutual funds as periodic dividend pay-outs.
  • On the other hand, growth plan of a mutual fund that is used by an investor is for capital appreciation, which is in the value of the holding of the mutual fund units. Dividend Yield scheme falls under a specific type of mutual funds. Therefore, like every other mutual fund, it has two varieties—dividend and growth.
  • On comparing the two measures of dividends, the dividend yields are the simple rate of return which is in form of cash dividends to the shareholders.
  • Dividend payout ratio of a company is considered a better indicator of the company’s capability to distribute dividends consistently. It is a company’s net earnings which are then utilized to pay out as dividends. Therefore, Dividend Payout Ratio is considered a more accurate measure as it is closely connected to the company’s cash flow.

Why Invest in Dividend Yield Fund?

It is necessary to know that Dividend Yield is the amount of the dividend which is divided by the current stock price. Therefore, to determine a good dividend yield fund, one has to look for higher yield. Take a look at the three essential factors for the same-

Total Returns

A good dividend yield is not directly proportional to the percentage value of the dividend. Stock investor returns are of two important aspects- dividends and its capital appreciation. The amount that an investor receives is the dividend and the change in the stock’s price is the capital appreciation. The amount of the dividend changes much lesser than the variations in stock price. Therefore, it doesn’t matter if the dividend yield is high or good, the overall returns should be considered.

Dividend Safety

A dividend’s security has to be considered minutely because future returns from the dividends are of much importance. The yield is calculated by dividing the sum of previous four quarterly dividends with the current stock price. Hence, the current dividend yield should not be the only factor as the yields might differ going forward.

Dividend Growth

Growth is the next major factor to look at as some specific dividends (real estate companies etc.) show the tendency of increasing with time. In this case, the current dividends might be low, but the yields in near future increases annually. These become a rising stream of income that is protected against inflations.

Top 5 Dividend Yield Funds

Aditya Birla Sun Life Dividend Yield Funds

Launched in February 2003, this dividend yield fund is currently the oldest fund. It has provided long term returns around 2.01% to 5.23% over the last 3 to 5 year period, respectively. Its returns, however, have been consistently low. A relatively aggressive fund, has assigned significant sections of its assets to small-cap and mid-cap companies. This is because they tend to be more reactive to movements in the market. As of August 10, 2019, there is an allocation of around 48% of its assets to large-caps, 33.13% to mid-caps, and 17.87% to small caps.

Its equity of 96.17%, 2.07% in cash and cash equivalents, and 1.76% debts has enabled it to maximize the exposure. Infosys at 5.82%, ITC of 3.77%, and Coal India of 3.11% are this scheme’s top company holdings. Among many other dividend yield funds, Aditya Birla Sun Life Divided Yield Funds is one of the best and are attractive to most investors with an appetite for minimum risk.

ICICI Prudential Dividend Yield Equity Funds

A moderately new dividend yield fund was launched in the month of May, in the year 2014. Despite being fairly new, they have managed to expand in a short span by having attracted the attention of a considerable portion of investors, including analysts. The return generated was an agreeable 5.65% over the last 3 years. Therefore, it is in the top few of the best dividend yield funds list.

Their scheme’s allocation is more focused on the large-caps (around 60%), the mid-caps (nearly 28%), and the small-caps (nearly 28%). Their investment strategy is rather aggressive as observed by their asset allocation across the market capitalization. It is through and through aggressive—even with the sector-wise allocation of funds. This is because of the higher weightage given to consumption-driven sectors than defensive sector, namely finance, power and pharmaceuticals respectively. The ICICI Prudential Dividend Yield Equity Funds are better suited for those investors who follow the aggressive high-quality investments and have a consistent track record.

Principle Dividend Yield Funds

These dividend yield funds were launched a year after the first one on this list, on 2004 in the month of October. One of the best dividend yield funds in the market are veterans of the market. Their returns have surpassed their benchmark ones from the previous 3 to 5 years.

Their portfolio consists of a maximum exposure to large-cap stocks. They are considerably conservative in their allocation and relatively aggressive with sector-wise allocation. The allocated funds, as of 10th August 2019, for large-caps is around 68.20% of the assets, for mid-caps around 14.28%, while the small-caps constitute of 17.53%. Major investments are in cyclical sectors such as banks and automobiles. Principal Dividend Yield Fund is a great choice for larger equity funds and dividend yield funds.

Templeton India Equity Income Fund

Templeton India Equity Income Fund belongs to the equity funds category and was launched in the year 2006. They are still a popular investment option among the equity investors. Their returns were as high as 7.34% and 8.82% over the last 3 and 5 year period, respectively.

However, their returns did not outperform the benchmark of the previous two tenures. It has allocated around 40.60% of the assets to large-caps and 35.51% to mid-caps, but the small-caps investment was around 17.79% alone.

Their sector-wise allocation witnessed a maximum asset investment into equity around 98.46% and rest in cash and cash equivalents around 1.54%. A relatively aggressive fund with a capability of good results, Templeton India Equity is a veteran of the equity income fund.

UTI Dividend Yield Funds

India’s oldest mutual funds house—UTI Mutual Funds launched UTI dividend Yield Funds in May 2005. It showcased good performance and has generated a return of 8.12% and 8.40% for the years 3 and 5 years, respectively. The investments are allocated accordingly- majority investments in large-caps about 65.74%, in addition they invested 29.48% to mid-caps, and 4.79% to small-cap investments.

Their foremost company holdings are the following- Infosys about 9.48%, Tata Consultancy about 6.25% and ITC about 5.54%. The UTI Dividend Yield Funds scheme is an excellent option to consider while investing due to their consistently proven track record and their blue-chip investments.

FAQs on Best Dividend Yield Funds

What are Dividend Mutual fund yield?

A dividend mutual fund invests in company shares that pay dividends (a part of the profits the company earns). It happens when the stock is sold for a higher price from the amount it was purchased for. These profits are then added to the Net Asset Value by the asset management company. Mutual Fund yield is the measure of the return in income of a mutual fund. It varies with fund’s market value and its annual dividend distributions changes too. They are typically calculated daily as the market closes with fund’s net asset value.

When are the dividends paid to the investor?

Depending on the scheme, the Asset Management Company can choose to pay dividends from the various options- monthly, quarterly or on annual basis. Though not guaranteed, most dividend funds are paid according to the mandate. At the same time, the dividend amount is also not fixed. It is to be understood that under the dividend option, the Net Asset Value after a specific value is not allowed to grow. Once the critical value is obtained, they are paid out as dividends.

What tax implications are there for dividends?

These funds are tax-free with the investor as the dividends are obtained from mutual funds. However, DDT (Dividend Distribution Tax) of 29.12% is paid by the fund house on debt funds, inclusive of surcharge and cess. Dividend equities have no tax implications (DDT) and are of moderate-risk with intermittent funds.

Why should we invest in Dividend Yield Funds?

This scheme acts as a tool that identifies stock values. The fund manager of these funds focuses on investing in firms that have stable cash flow and a history of high paying dividends—they have good investment fundamentals. These investments exhibit minimal volatility in the market and have a consistent return, based on the investment different pay-outs are provided.

How are mutual funds dividend yields calculated?

You can calculate Dividend Yield Funds by dividing annual dividend income distribution payment by the share of mutual fund. These mutual fund yields vary with the fund’s market value and the annual dividend distribution.

(Dividend Yield = Annual Dividends per/ Share Price per Share)