IDBI Mutual Fund, backed by IDBI Bank, has filed papers for a new product: IDBI Dividend Yield Fund. Dividends are a great pull for investors. The number of companies that pay dividends is small. Importantly, companies who regularly pay dividends are thought to possess excellent financial health and cash reserves. The IDBI Dividend Yield Fund will be an open-ended equity scheme predominantly investing in dividend yielding stocks.
Asset allocation pattern
The IDBI Dividend Yield Fund will invest between 65-100% in equity and equity related instruments of dividend-yielding companies. The rest will be in other than dividend yielding companies (0-35%), debt and money market instruments(0-35%), units issued by Real Estate Investment Trusts (REITs) & Infrastructure Investment Trusts (InvITs) (0-10%). Also, the scheme may invest up to 50% of net assets into equity derivatives instruments for hedging.
Benchmark – The IDBI Dividend Yield Fund will be benchmarked against the Nifty Dividend Opportunities 50 – Total Return Index (TRI). Nifty Dividend Opportunities 50 Index is designed to provide exposure to high yielding companies listed on NSE while meeting stability and tradability requirements. The NIFTY Dividend Opportunities 50 Index comprises of 50 companies. The methodology employs a yield-driven selection criterion that aims to maximize yield while providing stability and tradability.
Investment strategy – For those who don’t know, the dividend yield is the ratio (expressed as a percentage) of total dividend declared per share, for the financial year (or relevant period) divided by the market price.
The investment strategy of the scheme would be to invest predominantly in the stocks of dividend yielding companies as identified at the time of investment.
What are dividend yielding firms – Dividend yielding companies will be identified as companies that have paid a dividend in at least one of the three preceding financial years. The dividend yield is the major criteria for selection of the stocks for constructing this portfolio.
Other parameters such as, but not limited to cash flow generation, earnings growth prospect, business fundamentals, expansion plans, the competitive position including pricing power, strong balance sheet, management quality and so on would also be considered.
It is perceived that high dividend yielding stocks have a limited downside, especially in a falling equity market compared to other stocks. It is a general belief that high dividend paying companies are rich in cash generations from its business and such stocks provide good possibilities of capital appreciation in a reviving market.
The scheme’s small exposure to other than dividend yielding companies will be focussed on firms having sound business fundamentals, quality management, growth prospect etc.
Exit load – If units of the scheme are redeemed or switched out in excess of the limit within 12 months from the date of allotment – 1% of the applicable NAV is exit load.
Fund manager – 37-year old Ashish Mishra will manage the IDBI Dividend Yield Fund. He already manages IDBI Diversified Equity Fund, IDBI Midcap Fund, IDBI Gold Exchange Traded Fund, IDBI Gold Fund and IDBI Focused 30 Equity Fund.
Mishra has 13 years of work experience. His earlier associations in investment management roles were with ING Investment Management India Pvt Ltd. and Union Bank of India (Treasury).
Fund peers & performance
IDBI Dividend Yield Fund has some existing peers. There is Rs 2700-crore UTI Dividend Yield Fund, Rs 970-crore Aditya Birla Sun Life Dividend Yield, Rs 206-crore ICICI Prudential Dividend Yield Equity Fund, Rs 187-crore Principal Dividend Yield Fund, Rs 8-crore Reliance ETF Dividend Opportunities, and Rs 7-crore HSBC Asia Pacific (Ex Japan) Dividend Yield Fund. Most of these funds were launched 10-12 years ago. However, they have remained niche offerings.
In the last year, dividend yield funds have given returns between 10% to minus 7%. In the last 3 years, gains have been between 6-16%. In the last 5 years, returns have been between 15-20%. Over a 10-year period, the gain has been between 13-14%.
RupeeIQ take – Investing in dividend yielding stocks is an interesting theme. It is in vogue especially during times when returns are low or there is high volatility. Such stocks become safe-havens during market crashes. In normal times, this theme does not work so well because dividend yields are quite low compared to developed markets. The Sensex has a dividend yield of 1.2% compared to Dow Jones’ 2.1% or FTSE 100’s 4.08%.
Any fund manager using such stocks to form a portfolio has to invest in companies with above average income through a focus on securities with a history of above-average dividends, dividend growth or dividend stability. This calls for a low beta approach. Such funds are designed to limit exposure to downside risk when compared to general equity market index investing. We expect the fund manager to focus on the sustainability of the dividend and the opportunity for dividend growth, rather than just obsess on the absolute level of the company’s dividend.