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Category Analysis: Dividend Yield Funds
July 8, 2011

Introduction to dividend yield funds and their performance.


Author : Manjunath Gaddi



 Category Analysis: Dividend Yield Funds

Interpreting Dividend and Dividend Yield

A profit making company has two ways to utilise its profit –

  • To grow or enhance the business or

  • To distribute the profits amongst the shareholders

The company can also choose to give out some of the profits to the shareholders and retain the remaining for the company’s activities. The profits can either be shared in the form of money or shares of the company. The money shared with the shareholders is known as Dividend.

Many investors choose to invest into the stocks of dividend paying companies as they get tax free income in the form of dividends. One of the key metrics used by such investors to evaluate which stocks to buy is known as Dividend Yield. Dividend yield is the ratio of the annual dividend paid out by the company to the stock price.

Dividend Yield = Annual Dividend paid out by the company/Price per share

Dividend yield measures the attractiveness of a dividend paying stock i.e., how much money you are paying for every rupee of dividend. Suppose a company pays out Rs. 10 as dividend per share and the share price of that company is Rs. 100, then the dividend yield of that company is 10%. It also means that you are paying Rs. 10 for every Rs. 1 of the dividend.

Higher The Dividend Yield, Better The Investment

A higher dividend yield is preferred over a lower or no dividend yield. A high dividend yield can also indicate the undervalued nature of the stock and there can be a possibility of the share price of this company going up in the near future. The investor can benefit from such an investment strategy in two ways, one he will get a sure dividend which is tax-free and a possible appreciation in the price of the share.
In a study conducted by Henry Chip Dickson and Charles Reinhard (Lehman Brothers Equity Research), it was observed that the high dividend yield stocks have outperformed low dividend yield stocks in the US over a 36 year period with lower risk. Additionally, another study titled “When the bear growls: bear market returns 1970-1996”, done by David Dreman and Eric Lufkin has shown that high dividend yield stocks outperformed other value strategies and the market on an average in down market quarters between 1970-1996.

Dividend Yield Funds

Dividend yield funds implement the strategy of investing into high dividend yield stocks. There are six dividend yield funds in India and all of them were started either in 2005 or before. The chart 1 shows the average performance of dividend yield funds in comparison to BSE SENSEX, BSE Midcap and BSE 500 Index. These three indices cover the large cap, multi-cap and midcap sectors of the Indian equity market.

The chart shows the performance from 30 December 2005. Although, the dividend yield funds as a category underperformed all the three indices From January 2006 to September 2008, the performance of the dividend yield funds has taken a complete U turn post September 2008 and currently (as at 30 June 2011), the dividend yield category has outperformed all the three indices. UTI Dividend Yield is our recommended dividend yield fund and has outperformed the category average and the indices by a huge margin.

If an investor had invested Rs. 10,000 into each of the six dividend yields fund on 30 December 2005, then on 30 June 2011, the investments would have been worth Rs. 20,737 on a average, Rs.24,923 by investing into UTI Dividend Yield fund (Our recommended Dividend Yield fund), Rs. 20,053 in SENSEX, Rs. 15,482 in BSE Midcap Index and Rs. 19,140 in BSE 500 Index.

Chart 1: Performance of Dividend Yield Category in comparision to SENSEX, BSE Midcap and BSE 500 Indices

Table 1 shows the performance of the top performing short term funds over a 5 year period. Returns of 1 year and less than 1 year are absolute; Returns for periods more than one year is annualized.

Table 1: Performance of Indices and Dividend Yield funds

 

6 Months

1 Year

3 Year

5 Year

UTI Dividend Yield(G)
-4.99
8.67
22.38
21.09
Average Returns of Dividend Yield funds
-4.58
7.06
22.53
17.05
BSE MIDCAP
-11.15
-4.13
8.36
9.36
BSE SENSEX
-7.57
6.47
11.87
12.17
BSE-500
-8.02
2.44
11.68
12.50
Source: iFAST Compilations

Also one event to be noted in the graph is the drop in the indices between January 2007 and September 2008. The dividend yield category has lost the least and furthermore, the UTI Dividend Yield Fund was performing slightly lower than BSE SENSEX or the BSE 500 Index in January 2007, but has outperformed the indices in September 2008 and has continued to maintain this position since then.

Our View on Dividend Yield Funds

Dividend Yield Funds can give good returns in the long term while exhibiting lower risk in comparison to other diversified equity funds. Comparatively, Dividend Yield Funds also suffer lower losses in times of correction; this feature can definitely attract a conservative investor looking to invest into equities. Thus, we have an allocation to the UTI Dividend Yield in our conservative portfolio ever since the portfolio was incepted. Not only conservative but also, other investors can evaluate this fund category.

Our recommended fund in the dividend yield space is UTI Dividend Yield as this is the best performing dividend yield fund in the country.


Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. Risk Factors: Mutual funds, like securities investments, are subject to market risks and there is no guarantee against loss in the Scheme or that the Scheme’s objectives will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on various factors and forces affecting capital markets. Past performance of the Sponsor/the AMC/the Mutual Fund does not indicate the future performance of the Scheme. The name of the Scheme does not in any manner indicate the quality of the Scheme, its future prospects or returns. Please read the Statement of Additional Information and Scheme Information Document carefully before investing.



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