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Dividend Yield Funds

Dividend Yield Funds invest at least 65% of their portfolio in equities such that the stocks reward shareholders with high and consistent dividend payouts, bonus shares or share buybacks. These funds can have a value tilt, they can be a blend of growth and value, or they may be growth-oriented. View More

The aim of these funds is to provide medium to long term gains and/or dividend distribution by investing in equity and equity-related instruments of dividend-yielding companies. Dividend Yield Funds with a value tilt invest mainly in stocks that are undervalued and are trading at a market price that is lower than their intrinsic value.

However, the companies that the funds invest in have strong fundamentals, so the market will eventually realise their actual value.

Best Dividend Yield Funds

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Who Should Invest in Dividend Yield Funds?

  • Dividend Yield Funds are good for investors who want a regular income in the form of dividends since the mutual funds pass on the dividends from the companies to the investors. Although Dividend Yield Funds can invest across market capitalisation and sectors, most of these funds invest at least 50% of their assets in large cap companies that are mature and have a healthy cash flow in order to pay dividends.

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  • Dividend Yield Funds are best for moderate risk takers since these funds are relatively less risky as compared to small cap, mid cap and growth-oriented funds. So, during a downturn, they tend to fall less than the aforementioned funds. Investors who don’t want to be affected by volatility can invest in Dividend Yield Funds since the companies the funds invest in are generally capital intensive businesses that are less volatile.
  • Investors who are not confident about picking out dividend yielding stocks on their own can opt for the mutual fund route.
  • The funds provide a high return on investment in the long run. Hence, they are suitable for investors who want to stay invested for at least 5 years.
  • These funds are good for investors who want to avoid a steep tax on dividends. When you invest in stocks that pay dividends, the dividends from stocks are taxed in the hands of the investors at a high marginal tax rate. In the case of the dividend yield funds, the dividends are taxed at a much lower rate.

Features of Dividend Yield Funds

  • These funds are benchmarked against the Nifty Dividend Opportunities 50 Index, so high dividend yielding stocks are selected by the fund house after looking at this index.

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  • Dividend Yield Fund managers prefer to invest in companies for at least 5 years since these are equity mutual funds. Some fund managers favour blue-chip companies with a simple business model rather than businesses that have a complex business model.
  • These funds have to invest at least 65% of their assets in equities. Moreover, they prefer to invest almost 50% of their assets in large cap stocks of mature companies.
  • These funds help you beat the high taxes on dividends from stocks.
  • High dividend stocks for the best Dividend Yield Funds are selected by the fund houses after looking at the earning capacity of the companies, depending on factors like brand equity and earnings per share (EPS) growth rate. Companies with high EPS and EPS growth rates will have more room for increasing their existing dividend payout.

Taxability of Dividend Yield Funds

  • Low-interest rates make high Dividend Yield Funds attractive for investors who want higher tax-efficient gains. Such investors shift their investment from dividend paying stocks to Dividend Yield Funds to avoid a steep tax on dividends. This is because investors are taxed less when they buy the funds as compared to when they invest in equities with the dividend payout option.

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  • If you hold the fund for up to one year, the dividend gains get converted to capital gains. These are taxed at 10%, provided the dividend income is above Rs 5000. This rate is very low compared to the marginal tax rate on dividend payout from stocks which is 30% plus. Thus, Dividend Yield Funds are more tax-efficient than equities with the dividend payout option.

Risk Involved with Dividend Yield Funds

  • It is best to invest in Dividend Yield Funds with a reasonable size corpus. You should avoid funds with a small size corpus since the right investment strategy can make these funds look appealing as compared to other funds, but small mistakes on the part of the fund managers can make plunge the funds to the bottom.

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  • Thematic Dividend Yield Funds invest at least 80% of their assets in stocks that are tied to a common theme. These funds are very risky since their success depends upon a theme playing out. If that doesn’t happen, then none of the stocks that the fund managers have invested in will perform well. These mutual funds are suitable only for experienced investors who typically allocate 10% of their portfolio to such funds. Thematic Dividend Yield Mutual funds are very volatile in the short-term, but if they are held for a period of 5 years, the risk comes down substantially.
  • It is important for the companies to have sound management since the future earnings of the companies that determine the dividends depend on whether the decisions of the top management resonate with the ideology of the companies.
  • When markets are rising, a dividend yield fund returns less compared to small cap, mid cap and growth-oriented funds.

Advantages of Dividend Yield Mutual Funds

  • Dividend Yield Funds invest mainly in dividend yielding stocks that have a consistent record of paying timely dividends. The fund house passes on these dividends to the investors. Hence, these funds are perfect for investors who want a regular income in the form of dividends.

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  • These funds result in higher tax-efficient gains.
  • Dividend Yield Funds invest in companies that provide protection during market volatility. When markets are bearish, these funds perform better than small cap, mid cap and growth-oriented funds, so the investors benefit. In an underperforming equities market, high dividend yielding companies experience lower volatility, and once the market stabilises, they return gains that are in line with the market.
  • Fund managers also invest in companies that are less risky. These companies don’t depend heavily on debt financing. Companies with high-interest coverage ratios are attractive for fund managers since such companies are generally not risky. The interest coverage ratio of a company determines whether it can pay off its debts. The ratio is calculated by dividing the earnings before income and tax by the company’s interest expense.

Since Dividend Yield Funds invest in several sectors, including IT, pharmaceutical, metals, consumer goods, construction, oil and gas, power, financial materials, chemicals and automobiles, you get good exposure to all the sectors. Moreover, some of these funds even have exposure to overseas stocks.

People who favour investing a small part of their portfolio in thematic dividend yield funds whose success depends on a theme playing out as expected should be aware that these funds delivered 23.14% returns in 2021. Their 3 year and 5-year returns were 17.9% and 14.07% per annum.

Popular Dividend Yield Funds

  • Fund Name
  • Min SIP Investment Amt
  • AUM (Cr.)
  • 3Y Return

Templeton India Equity Income Fund – Direct Growth is an Dividend Yield scheme that was launched on 01-01-13 and is currently under the management of our experienced fund manager Anand Radhakrishnan. With an impressive AUM of ₹1,581 Crores, this scheme's latest NAV is ₹103.2041 as of 18-08-23.

Templeton India Equity Income Fund – Direct Growth scheme has delivered a return performance of 12.3% in the last 1 year, 29% in the last 3 years, and an 15% since its launch. With a minimum SIP investment of just ₹5,000, this scheme offers a great investment opportunity for those looking to invest in Dividend Yield funds.

  • Min SIP Investment Amt
  • ₹5,000
  • AUM (Cr.)
  • ₹1,581
  • 3Y Return
  • 12.3%

ICICI Pru Dividend Yield Equity Fund – Direct Growth is an Dividend Yield scheme that was launched on 16-05-14 and is currently under the management of our experienced fund manager Mittul Kalawadia. With an impressive AUM of ₹2,103 Crores, this scheme's latest NAV is ₹36.41 as of 18-08-23.

ICICI Pru Dividend Yield Equity Fund – Direct Growth scheme has delivered a return performance of 20.4% in the last 1 year, 31.9% in the last 3 years, and an 15% since its launch. With a minimum SIP investment of just ₹5,000, this scheme offers a great investment opportunity for those looking to invest in Dividend Yield funds.

  • Min SIP Investment Amt
  • ₹5,000
  • AUM (Cr.)
  • ₹2,103
  • 3Y Return
  • 20.4%

LIC MF Dividend Yield Fund – Direct Growth is an Dividend Yield scheme that was launched on 21-12-18 and is currently under the management of our experienced fund manager Alok Ranjan. With an impressive AUM of ₹91 Crores, this scheme's latest NAV is ₹20.35 as of 18-08-23.

LIC MF Dividend Yield Fund – Direct Growth scheme has delivered a return performance of 11.1% in the last 1 year, 20% in the last 3 years, and an 16.5% since its launch. With a minimum SIP investment of just ₹5,000, this scheme offers a great investment opportunity for those looking to invest in Dividend Yield funds.

  • Min SIP Investment Amt
  • ₹5,000
  • AUM (Cr.)
  • ₹91
  • 3Y Return
  • 11.1%

Sundaram Dividend Yield Fund – Direct Growth is an Dividend Yield scheme that was launched on 02-01-13 and is currently under the management of our experienced fund manager Ratish Varier. With an impressive AUM of ₹553 Crores, this scheme's latest NAV is ₹103.8423 as of 18-08-23.

Sundaram Dividend Yield Fund – Direct Growth scheme has delivered a return performance of 13.3% in the last 1 year, 21.9% in the last 3 years, and an 13.6% since its launch. With a minimum SIP investment of just ₹5,000, this scheme offers a great investment opportunity for those looking to invest in Dividend Yield funds.

  • Min SIP Investment Amt
  • ₹5,000
  • AUM (Cr.)
  • ₹553
  • 3Y Return
  • 13.3%

Aditya Birla SL Dividend Yield Fund – Direct Growth is an Dividend Yield scheme that was launched on 01-01-13 and is currently under the management of our experienced fund manager Dhaval Gala. With an impressive AUM of ₹976 Crores, this scheme's latest NAV is ₹335.16 as of 17-08-23.

Aditya Birla SL Dividend Yield Fund – Direct Growth scheme has delivered a return performance of 21.3% in the last 1 year, 25.3% in the last 3 years, and an 12.5% since its launch. With a minimum SIP investment of just ₹1,000, this scheme offers a great investment opportunity for those looking to invest in Dividend Yield funds.

  • Min SIP Investment Amt
  • ₹1,000
  • AUM (Cr.)
  • ₹976
  • 3Y Return
  • 21.3%

UTI-Dividend Yield Fund – Direct Growth is an Dividend Yield scheme that was launched on 01-01-13 and is currently under the management of our experienced fund manager Swati Kulkarni. With an impressive AUM of ₹3,132 Crores, this scheme's latest NAV is ₹126.4543 as of 18-08-23.

UTI-Dividend Yield Fund – Direct Growth scheme has delivered a return performance of 13.7% in the last 1 year, 21.3% in the last 3 years, and an 12.9% since its launch. With a minimum SIP investment of just ₹5,000, this scheme offers a great investment opportunity for those looking to invest in Dividend Yield funds.

  • Min SIP Investment Amt
  • ₹5,000
  • AUM (Cr.)
  • ₹3,132
  • 3Y Return
  • 13.7%

Tata Dividend Yield Fund – Direct Growth is an Dividend Yield scheme that was launched on 20-05-21 and is currently under the management of our experienced fund manager Sailesh Jain. With an impressive AUM of ₹554 Crores, this scheme's latest NAV is ₹13.6355 as of 18-08-23.

Tata Dividend Yield Fund – Direct Growth scheme has delivered a return performance of 17.7% in the last 1 year, -% in the last 3 years, and an 14.8% since its launch. With a minimum SIP investment of just ₹5,000, this scheme offers a great investment opportunity for those looking to invest in Dividend Yield funds.

  • Min SIP Investment Amt
  • ₹5,000
  • AUM (Cr.)
  • ₹554
  • 3Y Return
  • 17.7%

HDFC Dividend Yield Fund – Direct Growth is an Dividend Yield scheme that was launched on 18-12-20 and is currently under the management of our experienced fund manager Gopal Agrawal. With an impressive AUM of ₹3,572 Crores, this scheme's latest NAV is ₹18.457 as of 18-08-23.

HDFC Dividend Yield Fund – Direct Growth scheme has delivered a return performance of 20.5% in the last 1 year, -% in the last 3 years, and an 25.8% since its launch. With a minimum SIP investment of just ₹100, this scheme offers a great investment opportunity for those looking to invest in Dividend Yield funds.

  • Min SIP Investment Amt
  • ₹100
  • AUM (Cr.)
  • ₹3,572
  • 3Y Return
  • 20.5%

Frequently Asked Questions

How do fund houses select ‘High Dividend’ companies?

Most fund houses select ‘High Dividend’ companies by comparing their dividends yield with a benchmark index like Sensex or Nifty 50. For example: If the dividend yield of Nifty 50 currently is near 1.25, a fund house would prefer investing in companies having a dividend yield higher than 1.25.

Is it a good idea to invest in Dividend Yield funds?

Dividend yield funds are generally stable and are a good investment for those looking for low volatile stocks. These funds are not recommended for aggressive growth-seekers, but they prove to be a good addition to most investment portfolios.

Generally, a mutual fund share price falls soon after paying a dividend; why so?

Mutual fund share prices fall after paying dividends because the money paid as dividends is extracted from the existing assets of the fund. 

Do dividend yield funds invest only in ‘High Dividend' companies?

Most dividend yield funds invest about 75%-80% of their capital in high dividend-paying companies. The remaining corpus is invested in companies’ stocks with high returns potential in the future. 

The trick here is to invest in companies with low dividend yields or no-dividend pay that would provide good returns if they are undervalued, provided their fundamentals are strong. 

What is considered to be a good dividend yield?

A reasonable dividend yield depends on the market conditions, but an average yield between 2% to 6% is considered ideal. 

Who are these funds suited for?

Dividend Yield funds focus on the dividend yield of stocks. They are appropriate for investors who are looking to invest in equity funds but with a low level of volatility in their investments. These funds are invested in companies that are generally stable and hence are best suited for the following groups of investors/individuals:

  • Low-risk appetite- Investors who do not prefer to take high risks and prefer to let go of better profits without exposing themselves to market risks. 
  • Diversified portfolio- Those willing to have an all-around investment and assess risk on a large scale should invest in Dividend Yielding funds, thereby assisting the investor in having a diversified portfolio.
  • First-time investors- These funds provide minimal risk-investment routes for limited periods and are best for those investing for the first time in mutual funds. 
  • Short-investment horizon- These funds generate high returns even in short time frames; hence it is a good investment for those who do not want to wait for long spells to gain returns from their investments.
  • Regular income- Investors who are hoping for a regular income from their investments, even though a low one, should consider investing in these funds. 
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