What are Dividend Yield Mutual Funds


There are various categories and types of mutual funds but one category with probably the least number of schemes in it is the ‘Dividend Yield’ category.

Dividend Yield mutual funds are probably the least discussed, analysed and invested in among all the categories of mutual funds.

This can easily be ascertained by the Assets Under Management (AUM) that funds under this category hold.

uti dividend yield fund

What is a Dividend Yield mutual fund?

  1. A dividend yield mutual fund is a mutual fund scheme that invests in companies that have historically declared dividends perpetually for a long time.
  2. Therefore, by default it means these mutual fund schemes invest in companies with strong balance sheets, highly efficient management and a robust functioning in place.

This is because a company can only declare high dividends only if it makes good profits and it can only make good profits when it satisfies all the qualifications mentioned above.

It is not enough that these companies pay high dividends consistently to qualify for a dividend yield mutual fund, they also need to have a high dividend yield.

The fact that the fund has to invest in a particular set of stocks, makes the job of the fund manager easier considering his choices are limited anyway.

A dividend yield fund is not one that pays dividends regularly, it is one that invests in companies that pays dividends regularly.

The name of the fund denotes the approach of the fund rather than a willingness or potential to pay dividends.


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What are Dividends?

Dividends are declared by companies when they make profits.

Usually strong companies who are leaders in their respective sectors declare dividends since well run companies are more likely to make profits than the not so well-run ones.

There is no obligation on companies to declare dividends only because they make a profit, at times they may decide to keep a hold of their profits entirely for other purposes.

A company declaring dividend, a mutual fund declaring dividend and a dividend yield mutual fund are all 3 different things and do not mean the same.


 Additional reading: Click Here to read as to what went wrong with HDFC Balanced Advantage Fund



What does Dividend Yield mean?

  1. Dividend Yield is the dividend paid per unit divided by the market price.
  2. It is the ratio of past paid dividends to the market price per share.
  3. This includes both partial and full dividends.

uti dividend yield fund


Companies that pay dividends usually do so annually and then there are some who may even do so more than once in a year.

A dividend yield ratio most importantly takes into account the price of stock of the company.

If the stock price of a company is low for whatever reasons but it has a good history of pay dividends regularly then it would be preferred over a company with a high price and having a good track record of paying dividends.


Dividend paying mutual funds and Dividend Yield mutual funds

The dividend option in a mutual fund scheme and a dividend yield mutual fund scheme are not the same thing.

The dividend option in a particular mutual fund merely means that you are eligible for dividends as and when the mutual fund scheme declares so.

It is not mandatory for the mutual fund scheme to declare dividends though and there is no guarantee of the same.

A dividend yield mutual fund on the other hand invests in companies with a high dividend yield ratio, meaning companies that have a good track record in declaring dividends and their stock prices are at an attractive valuation.

Additional reading: Click Here to read our complete review of Kotak Standard Multicap Fund.


Advantages of Dividend Yield mutual funds 

A dividend yield mutual fund would by default only be investing in quality stocks.

This is because only quality companies would be in a position to declare dividends on a regular basis.

This therefore means that the portfolio is only built with quality stocks.

Since the portfolio is made up of quality companies, it helps the fund to counter volatility which is a given with equity investing.

These funds provide a better risk reward for a medium to long term horizon outlook.

uti dividend yield fund



Disadvantages of Dividend Yield mutual funds

  1. The portfolio of such funds is restricted in terms of their choices.
  2. They can only invest in stocks of companies that have a high dividend yield ratio.
  3. Therefore, their hands are tied when it comes to portfolio diversification.

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These funds are not restricted with regards to caps be it large cap, mid cap or small cap.

There is a possibility then that these funds could allocate a higher proportion to mid and small cap companies.

Mid and small companies tend to fall the most in a volatile market.

The fund manager would be going with stocks of companies with a high dividend yield, irrespective of the cap.

Mid and small cap mutual funds need to be well diversified so as to face volatile times efficiently but that cannot be the case here since the fund manager’s choices are limited.

He/she can only pick mid and small cap companies with a high dividend yield ratio.


Which mutual fund is best for monthly income?

Neither dividend yield mutual funds nor mutual funds with dividend paying option are a good source of monthly income.

The taxation system applicable makes it for a very poor choice.

If you are looking for a mutual fund that can help you with a monthly income, then it is better to go with the Systematic Withdrawal Plan (SWP).

In a SWP you can withdraw a fixed or variable amount either weekly, monthly or quarterly depending upon your requirement.

Ideally the principal amount from where you make this withdrawal should have completed a minimum of 3 years (the longer the better) for conservative funds and longer for aggressive and moderately aggressive mutual funds.

       You should only invest in a dividend yield mutual fund if it adds something new to your existing portfolio, is not part of your core portfolio and you have a very good understanding as to the strategy applied by your dividend yield scheme because every dividend yield mutual fund functions in a manner that is distinct from the rest.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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