The equity markets in India and around most parts of the world have been very volatile for the last couple of months. Geopolitical tensions, the COVID-19 pandemic that still lingers amongst us, the outbreak of a new monkeypox virus, rising inflation, the central raising policy interest rates to control inflation, supply-chain disruptions, slowing economic growth, weak Indian rupee, and containing the current account deficit are some of the key factors are playing out on the market sentiments. Talks of a possible global recession are also doing rounds.
No one can foretell the course of the equity markets from hereon, despite a nearly 15% correction since the October 2021 peak. But as per the Reserve Bank of India (RBI), the Indian economy has displayed signs of resilience and is counting on monsoon, pick-up in manufacturing, services, and stabilisation in inflationary pressures.
Against this backdrop, investors who are planning for their envisioned financial goals are befuddled as to the kind of equity mutual fund schemes they should invest in. In this article, let’s understand whether Dividend Yield Funds can be your best bet, particularly in volatile times.
According to SEBI’s categorisation norms, any equity mutual fund scheme predominantly investing in dividend-yielding stocks is classified as a Dividend Yield Fund.
In practice, Dividend Yield Funds tend to focus on investing in a portfolio of companies that pay good dividends and have a scope for capital appreciation.
With nominal interest rates on Fixed Deposits (FDs) and their inability to counter inflation, Dividend Yield Funds are back in focus. In January 2020, Dividend Yield Funds had 475,387 folios and the AUM (Assets Under Management) of Rs 4,416 crore. The folio count increased to 584,894 as of June 2022 and the AUM to Rs 9,145 crore, according to the data published by the Association of Mutual Funds in India (AMFI).
The dividend yield, as you may know, is a function of the amount of cash dividend a company pays as a percentage of its market price. Some Indian companies, typically the ones with mature businesses, pay dividends generously. Such companies could be reasonably valued or generate high cash flows. They plough back less profits for growth. In some cases, their dividend yields are better than the interest rate on 3-year bank deposits.
For instance, BPCL, Vedanta, India Oil Corporation (IOC), Indus Towers, and Coal India are currently offering attractive dividend yields given the correction in their share prices. And in theory, other than capital appreciation, the basic purpose of investing in a stock is to participate in the profits earned by a company.
“If you want the recipe for getting rich in the stock market, here it is: Find stocks with above-average appreciation potential and safe and growing dividends and buy them at attractive prices.” – Charles B. Carlson, the CEO of Horizon Publishing and Horizon Investment Services, and author of The Little Book of Big Dividends: A Safe Formula for Guaranteed Returns.
Graph 1: Nifty Dividend Opportunities 50-Tri Vs Nifty 50-TRI
Data as of July 18, 2022
(Source: NSE, PersonalFN Research)
As depicted in Graph 1 above, the Nifty Dividend Opportunities 50-Total Return Index (TRI) has outperformed the Nifty 50-TRI over the last one year. The Nifty Dividend Opportunities 50 tracks the performance of the top 300 companies on average free-float market cap and average daily turnover.
As of June 30, 2022, the Nifty Dividend Opportunities 50 Index quoted at a Price-to-Earnings (PE) multiple of 11.3x and offered a dividend yield of 4.31%. Whereas the Nifty 50 Index traded at a PE of 19.5x and offered a dividend yield of 1.41%.
Moreover, the Nifty Dividend Opportunities 50-TRI has been less volatile historically compared to the Nifty 50 and has a low beta.
All this has attracted investors to take higher risk for better returns (than fixed deposits), and therefore, we have seen a rise in folio and AUM of Dividend Yields Funds. But mind you, not all Dividend Yield Funds are true to their label.
Table 1: Valuation matrix of Dividend Yield Funds
| Scheme Name | Scheme PE (x) | Scheme PBV (x) | Scheme Dividend Yield (%) |
| Templeton India Equity Income Fund | 18.01 | 4.04 | 3.88 |
| UTI Dividend Yield Fund | 25.03 | 6.29 | 3.72 |
| Aditya Birla SL Dividend Yield Fund | 28.49 | 5.18 | 3.68 |
| HDFC Dividend Yield Fund | 25.97 | 5.41 | 2.29 |
| IDBI Dividend Yield Fund | 32.96 | 6.20 | 2.03 |
| Sundaram Dividend Yield Fund | 29.48 | 5.19 | 2.16 |
| ICICI Pru Dividend Yield Equity Fund | 25.46 | 3.61 | 1.83 |
| NIFTY DIV OPPS 50 | 11.30 | 3.07 | 4.31 |
| Nifty 50 | 19.50 | 4.03 | 1.41 |
As per portfolio data as of June 30, 2022
(Source: NSE, PersonalFN Research)
Only a handful of Dividend Yield Funds are offering a decent dividend yield. Nevertheless, all Dividend Yield Funds had better dividend yields vis-a-vis the Nifty 50-TRI.
Table 2: The Performance of Dividend Yield Funds on a Risk-Adjusted Basis
| Scheme Name | Returns Absolute (%) | CAGR Returns (%) | SD Annualised | Sharpe | |||
| 1 Year | 2 Years | 3 Years | 5 Years | 7 Years | |||
| Templeton India Equity Income Fund | 9.5 | 39.3 | 21.5 | 13.5 | 13.3 | 21.05 | 0.22 |
| ICICI Pru Dividend Yield Equity Fund | 11.3 | 33.5 | 17.1 | 8.5 | 10.9 | 23.19 | 0.16 |
| IDBI Dividend Yield Fund | 2.2 | 22.3 | 16.6 | — | — | 19.99 | 0.16 |
| Sundaram Dividend Yield Fund | 1.8 | 24.3 | 16.6 | 11.5 | 12.0 | 20.01 | 0.15 |
| Aditya Birla SL Dividend Yield Fund | -1.5 | 24.0 | 15.6 | 6.6 | 7.4 | 22.00 | 0.14 |
| UTI Dividend Yield Fund | -0.9 | 23.1 | 15.4 | 10.8 | 10.2 | 20.40 | 0.14 |
| HDFC Dividend Yield Fund | 9.1 | — | — | — | — | 14.99 | 0.26 |
| Category Average | 25.2 | 38.9 | 18.2 | 12.7 | 12.7 | 19.45 | 0.26 |
| NIFTY 500 – TRI | 20.5 | 36.9 | 16.5 | 13.6 | 13.1 | 22.44 | 0.18 |
| NIFTY DIV OPPS 50-TRI | 19.6 | 30.0 | 10.5 | 9.0 | 9.1 | 19.56 | 0.15 |
Data as of July 18, 2022
Direct Plan and Growth Option Considered
(Source: ACE MF, PersonalFN Research)
Over the last 3 years, Dividend Yield Funds as a category have outperformed not only the Nifty Dividend Opportunities 50-TRI but also the broader market index, the Nifty 500-TRI. Schemes such as Templeton India Equity Income Fund, Sundaram Dividend Yield Fund, UTI Dividend Yield Fund, and ICICI Pru Dividend Yield Fund, due to their impressive portfolio characteristics have rewarded investors with appealing returns over the long-term.
Templeton India Equity Income Fund
Launched in May 2006, Templeton India Equity Income Fund invests in companies that have a current or potentially attractive dividend yield, by using a value strategy, with the aim to provide a combination of regular income and long-term capital appreciation.
The average dividend yield of the fund over the last 1 year has been around 4%, making it a truly Dividend Yield Fund. The portfolio P/E of the fund is around 21x.
It deploys a dominant portion (73.1%) of its equity portfolio in large-caps and the remaining (26.2%) in mid-cap and small-cap companies.
Table 3: Top 10 Stock Holdings of Templeton India Equity Income Fund
| Stocks | % of Assets |
| Power Grid Corporation Ltd. | 7.0 |
| Infosys Ltd. | 6.0 |
| Hindustan Unilever Ltd. | 4.6 |
| NTPC Ltd. | 4.5 |
| Brookfield India Real Estate Trust REIT | 4.0 |
| HCL Technologies Ltd. | 4.0 |
| Embassy Office Parks REIT | 4.0 |
| NHPC Ltd. | 3.8 |
| Bajaj Auto Ltd. | 3.7 |
| ITC Ltd. | 3.4 |
Data as of June 2022
(Source: ACE MF, PersonalFN Research)
As per its latest portfolio as of June 2022, the fund’s 10-top stocks accounted for 43.5% of the portfolio, making it fairly diversified. It includes names such as Power Grid Corporation, Infosys, Hindustan Unilever, NTPC, HCL Technologies, and NHPC, among others, plus has invested in REITs (Real Estate Investment Trusts) such as the Brookfield India Real Estate Trust and Embassy Office Park REIT.
Moreover, the fund has also taken exposure to the international markets and invested in overseas equities such as Xtep International Holdings Ltd., Unilever PLC, Xinyi Solar Holdings Ltd. Novatek Microelectronics Corp. Ltd., Primax Electronics Ltd., and MediaTek Inc. In total, the fund has held around 35 stocks in its portfolio and has been gradually increasing its exposure to utility companies and energy stocks.
Launched in January 2013, Sundaram Dividend Yield Fund aims to provide long-term capital appreciation and/or dividend distribution by investing predominantly in a well-diversified portfolio of companies that have a relatively high dividend yield.
The average Dividend Yield of the fund over the last 1 year has been around 1.6%, a tad higher than the Nifty 50-TRI. The portfolio P/E of the fund is around 34x, indicating the fund manager doesn’t mind paying a bit more for companies with high dividend yields and long-term value opportunities. Thus, it holds a dominant portion (nearly 80%) of its equity portfolio in large-caps and the remaining (20.2%) in mid-cap and small-cap companies.
Table 4: Top-10 Stock Holdings of Sundaram Dividend Yield Fund
| Stocks | % of Assets |
| Infosys Ltd. | 7.5 |
| Reliance Industries Ltd. | 6.1 |
| Tata Consultancy Services Ltd. | 5.0 |
| Hindustan Unilever Ltd. | 4.7 |
| NTPC Ltd. | 4.6 |
| ICICI Bank Ltd. | 4.6 |
| ITC Ltd. | 3.9 |
| HDFC Bank Ltd. | 3.8 |
| State Bank of India Ltd. | 3.0 |
| HCL Technologies Ltd. | 2.9 |
Data as of June 2022
(Source: ACE MF, PersonalFN Research)
As per the latest portfolio as of June 2022, the fund’s top-10 stocks comprise nearly 46% of the portfolio, making it fairly diversified. It includes names such as Infosys, Reliance Industries, Tata Consultancy Services, Hindustan Unilever, and NTPC, among others. Many of these are held with a buy-and-hold strategy; the fund manager refrained from churning the portfolio frequently. The fund has invested in companies across sectors. In total, the fund has 46 stocks in its portfolio and does not have exposure to international equities.
Being conscious of value, Sundaram Dividend Yield is also currently holding around 10% of its assets in cash and cash equivalents.
Launched in January 2013, UTI Dividend Fund while following its investment mandate (of predominantly in dividend yielding equity and equity-related securities) pursues a blend, i.e., a mix of growth and value style of investing. For this reason, the P/E of this fund at around 30x is on the higher side. That said, the average Dividend Yield of the fund over the last 1 year has been around 3.5%, noticeably higher than the Nifty 50-TRI.
Table 5: Top-10 Stock Holdings of UTI Dividend Yield Fund
| Stocks | % of Assets |
| Infosys Ltd. | 8.6 |
| ITC Ltd. | 8.1 |
| Tech Mahindra Ltd. | 5.7 |
| Mphasis Ltd. | 5.6 |
| NTPC Ltd. | 5.3 |
| Hindustan Unilever Ltd. | 4.2 |
| Tata Consultancy Services Ltd. | 4.2 |
| Marico Ltd. | 3.1 |
| L&T Infotech Ltd. | 2.9 |
| Torrent Pharmaceuticals Ltd. | 2.9 |
Data as of June 2022
(Source: ACE MF, PersonalFN Research)
UTI Dividend Fund holds around 70.2% of its equity portfolio in large-caps and the remaining 30% in mid-cap and small-cap companies. As per the latest portfolio as of June 2022, the fund’s top-10 stocks comprise nearly 50.7% of the portfolio, making it diversified. It includes names such as Infosys, Tech Mahindra, Tata Consultancy Services, and Mphasis, in the IT space, and ITC, Hindustan Unilever, and Marico, in the consumer staple sector. Besides this, the fund is well-diversified with exposure to companies from the energy, capital goods, metals & mining, healthcare, banking & finance, and other sectors. Many of these investments are held with conviction following a buy-and-hold strategy. In total, currently, the fund has 50 stocks in its portfolio and does not have exposure to international equities. The fund is fully invested and holds only 1.6% in cash and cash equivalents.
ICICI Pru Dividend Yield Equity Fund
Launched in May 2014, ICICI Prudential Dividend Yield Equity Fund aims to generate medium to long-term capital gains and/or dividend distribution by predominantly investing in a well-diversified portfolio of equity and equity-related instruments of dividend-yielding companies.
The average dividend yield of the fund has been 2.7%, while the P/E at around 30x. This again indicates that the fund manager doesn’t mind paying a bit more as it pursues a growth style of investing.
Table 6: Top-10 Stock Holdings of ICICI Prudential Dividend Yield Equity Fund
| Stocks | % of Assets |
| Infosys Ltd. | 9.2 |
| HCL Technologies Ltd. | 6.5 |
| Sun Pharmaceutical Industries Ltd. | 5.0 |
| ONGC Ltd. | 4.9 |
| Larsen & Toubro Ltd. | 4.7 |
| ICICI Bank Ltd. | 4.7 |
| Bharti Airtel Ltd. | 4.6 |
| Tech Mahindra Ltd. | 4.6 |
| Axis Bank Ltd. | 4.5 |
| Sundaram Finance Ltd. | 4.0 |
Data as of June 2022
(Source: ACE MF, PersonalFN Research)
As of June 2022, the fund has invested 81.5% of its equity portfolio in large-caps and 18.5% in mid-cap and small-cap companies. It is invested in Infosys, HCL Technologies, ONGC Ltd, Sun Pharma, Larsen & Toubro, among a host of other heavyweights, and seizing opportunities in the market correction has increased holding into them. The fund is also well-diversified across sectors. In total, currently, the fund has 38 stocks in its portfolio and does not have exposure to international equities. The fund’s cash and cash equivalents are currently 8.4% of its total assets.
The outlook for the Dividend Yield Funds
After maintaining the status quo for the last two years, the RBI raised the policy repo rate by 90 basis points (bps) so far this year. Given the risk to the inflation trajectory, the RBI is likely to further rates in 2022 while supporting growth.
Rate hikes may pose a risk for the equity markets, as we could witness a shift of money to debt and fixed income instruments with yields moving up. The consequence of higher inflation and pressure on bottom lines may also impact the ability of companies to pay high dividends, thus potentially impacting dividend yields and the performance of Dividend Yield Funds. Given this, it remains to be seen how the quantum of dividend income earned by Dividend Yield Funds gets affected due to rising inflation, increase in interest rates, and if equity markets fall further.
In challenging times — and even otherwise — prudent scheme selection is the key. Dividend Yield Funds may reward you well as against the risk taken, provided you recognise the portfolio characteristics of the schemes under consideration well, have a long-term horizon, and keep your returns expectations realistic. To mitigate the volatility, you may choose to take the SIP route, rather than investing a lump sum in a Dividend Yield Fund.
Happy Investing!
This article first appeared on PersonalFN here
