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Beginners Guide to Dividend Yield Funds
Written by Aditya Raj on January 13, 2021

Beginners Guide to Dividend Yield Funds

When one starts their journey in investing, they do it by researching on all the aspects of it, that is when Dividends Yield Funds come into the picture.

Despite the name suggests dividend yield funds do not require paying dividends instead dividend yield, or a share is the dividend per share, divided by the price per share.

There is so much to cover and I'm covering all the aspects of Dividend Yield Funds in the Blog, so make sure you read it till the end!

Explaining Dividend Yield Funds

To truly understand Dividend Yield Funds, you need to first understand what dividend yield is. The dividend yield is the ratio of the past paid dividends to the market price per share in which it includes full and partial dividends in the payouts. A stock may be one that pays good dividends annually, but the price of the stocks are comparatively higher.

Here dividend yield comes into play to ensure that the asking price for this secure dividend is not a lot as compared to the stock price. Now a dividend yield fund places most of its portfolio in stocks with high dividend yields.

Two sections in this definition need to be understood; the first one is the fund that does not put its entire portfolio in good dividend-paying stocks.

The second point addresses high yields of dividends, where the meaning of 'high' varies with funds. These funds invest only in corporations that have significantly high dividend-yielding stocks, enabling the fund managers to extract the maximum value out of the investments. Normally, a dividend yield fund invests around 70-80% of its amount in stocks that have a dividend yield higher than that in the market hence acting as a filter to help fund managers in-stock selection.

Features of Dividend Yield Funds

Dividend yield mutual funds are known to invest in those companies that distribute a huge portion of their profits amongst their investors. Usually, these are government-owned or private-sector companies that regularly payback to their stakeholders in the form of a high dividend to value.

Dividends Yield Funds provide constant and safe payments to an investor in mutual funds.

Dividend yield funds are known to invest maximum amounts in dividend yielding stocks, implying that the stock owner companies pay an above-average dividend in regular intervals.

With Dividend Yield Fund, companies get the option to either reinvest the net profit of the year into the next year or to distribute that profit amongst the stakeholders.

These dividends can only be paid from the profits booked by a mutual fund from its holdings decreasing the insecurity of losses.

Types of Dividend Yield Mutual Funds (Equity vs. Debt)

In Dividend Mutual Funds (Equity), are the funds which invest in equity and its related instruments in the company which yields high dividends of a company. An equity mutual fund scheme must invest at least 65% of the scheme’s assets in equities and equity-related instruments, as per the rule. The prime aim of these funds is to provide capital appreciation over a medium for long-term investment horizon.

Putting it simply, in the case of a dividend mutual fund (debt) as per the regulation, any dividend mutual fund has over 65% of its assets allocated to debts. This mutual fund scheme invests in fixed income instruments, such as bonds issued by the government and corporate debt securities, and money market instruments, etc. Debt dividend mutual funds are a popular investment option for investors who do not wish to take huge risks and want steady returns.

Debt mutual funds are referred to as fixed-income securities as the investor is aware of the returns he’ll be receiving from the investment right from the beginning which is why these funds are considered to be less risky than equity funds and offer these significant tax benefits.

Dividend Reinvestment Plan

A dividend reinvestment plan is also known as DRIP allows investors to reinvest their cash dividends into additional shares or fractional shares of the underlying stock on the dividend due date. Although, with the term plan you can apply to any automatic reinvestment arrangement set up through brokerage or an investor, it generally refers to a formal program offered by a publicly traded company to their existing shareholders.

Dividend Sweep Plan

Under the Dividend Sweep plan, the investors may opt to automatically invest in the net dividend amount payable under the scheme into any other target scheme of the shareholding company, at the applicable NAV of the target scheme and accordingly an applicable number of units are allotted in the target scheme.

Who Should Invest in Dividend Yield Mutual Funds?

Since the companies who deal in Dividend Mutual Funds are generally stable, so it is recommended that people who are looking for risk-free returns to invest in them

While dividend mutual funds are not recommended to those who are looking for higher volatility, it proves to be great for someone who is starting out in investments.

Dividend yield fund also proves to be an excellent addition for those who are looking for diversity in their investing portfolio.

Additionally, Dividend yield funds are recommended to elderly investors who are looking for a regular income source post investments.

Things to be considered before investment

Companies that often give higher payout rates are the ones that do not have enough growth opportunities.

Dividend Yields are not guaranteed because they largely depend upon the profits of the company, thus the payouts cannot be constant.

Dividend funds attract Dividend Distribution Tax (or DDT) paid by the company at the time of declaring dividends thus, the dividend is tax free in the investor’s hands, but the same is paid to him after deducting tax.

Before making any investments in a particular stock, one must check the fund’s consistent payout and growth in the dividend fund because these factors display how the funds have been performing in the past and what to expect from them in the future.

How to Invest in Dividend Yield Mutual Funds?

When you start in investing, one needs to look into some aspects of Investing:

Research Quality Stocks

Look out for divided funds of large corporations who have shown a history of financial stability. These mutual funds are likely to give better returns, risk free because they are better at handling market dips.

Some current highest dividend-payers on the market include the Apple Hospitality REIT, Equinix and the Apple Corporation.

Read stock's quote

A stock's quote holds all the essential information you must go through before you invest in it. Search for your stock’s quote and look for the information labeled under "dividend" or "annualized dividend"

This will show you how much money the stock paid out per-share last year to investors basically the back history of the funds.

If your quote does not include information on dividends, the stock may not currently be offering profit-sharing to investors.

Purchase your desired Dividend yield mutual funds

There are two ways through which you can invest in Dividend yield mutual funds.

Online Mode

If you wish not to indulge in the assistance of investors, you can always start investment by visiting any online investment platform available. Over the internet, you can compare thousands of schemes over various platforms and select the fund you wish to invest in.

If you are interested in investing in mutual funds online, you can use Groww, it is an India-based online investment platform that helpful for first-time investors and allows investors to open an account electronically. I personally love this platform, it's easy to use, explains your fund well and most of all, it is safe!

Offline Mode

If you are not confident in your knowledge of investment and wish to get assistance via investors and brokers. Through offline methods, you can invest in regular payment plans offering different results and varied expenses in investment.

Reinvest in your Dividends

A DRIP (Dividend reinvestment plan) will automatically reinvest your dividend payments for more shares of stock on payday, if you’d like to enroll in your stock’s DRIP, contact your broker.

Best Dividend Yield Mutual Funds

Updated On: 13 Jan, 2021
Fund NameRisk1Y ReturnsFund Size (in Cr)
ICICI Prudential Dividend Yield Equity Fund Direct GrowthModerately High18.5%₹171
Aditya Birla Sun Life Dividend Yield Plus FundModerately High20.9%₹714
Principal Dividend Yield FundModerately High24.2%₹187
UTI Dividend Yield FundModerately High25.3%₹2,388
Templeton India Equity Income FundModerately High29.6%₹939

 To Conclude

Dividend Yield Funds are comparatively easy and risk-free mutual funds investment that gives regular, timid returns to the investor. Being an exceptional experience for a person starting in investing, the returns in dividend yield are fairly low but risk-free. Before investing you must look into the previous performance of a plan to know exactly what to expect in the future, but whatever the pattern might be, the returns on dividend funds still depend upon the profits made by the company.

But all in all it is a very safe bet to play with and a great experience to start out in investing, and if you're interested, I’d say go for it!

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