Before understanding the Dividend Yield Fund, let's understand the dividend concept. A dividend is the part of profit that is distributed among its shareholders. It acts as a booster dose for an investor because shareholders get motivated as there is an additional gain on the investment, which ultimately increases the trust factor. A good dividend also increases the goodwill of the company, which leads to a long-term partnership between the company and its investors. Systematic investment plans through mutual funds are the talk of the town, as they have become retail investors favourite mode of investment in recent years. One of the key factors making SIP a favourite mode is the variety and diversification of investment options in multiple sectors, and that too with a minimal investment amount.
How to calculate Dividend Yield ?
Why Dividend Yield Mutual Funds or SIP are the best for long term?
In dividend-yield mutual funds, investment is made in the stock of companies that regularly declare dividends, or we can say that companies are making profits from time to time, leading to the regular distribution of the dividend to shareholders. If any company is giving a regular dividend, that means it is better than its competitors and has fewer chances of future failure. The future is uncertain, but companies with good net worth and good planning and strategies always lead and have better growth prospects, which ultimately leads to larger investment opportunities. As mutual funds focus on pooling funds by diversifying the portfolio, dividend yield funds focus on investing investors money in companies with strong financials and excellent cash flow. The selection of the companies by portfolio managers is based on the Nifty 50 with dividend yields above 1.25.
It is not necessary that in a dividend yield fund the money is invested 100% in high dividend companies; generally, 70%–80% of the total capital is invested in high dividend companies, with the remaining 20%–30% invested in stocks that have high return potential. The decision is with the asset management companies or fund managers who are taking care of the funds.
Aggressive investors usually avoid dividend-yield funds and focus on funds like mid-cap and small-cap. Investors who want to invest in equity as a preferred option but are not very comfortable with market volatility or ups and downs prefer dividend-yield mutual funds.
The three key factors to look into while selecting dividend-yield funds are as follows:
Investors have the option to select a fund from the multiple dividend-yield funds available in the market today. While selecting the fund, investors need to make sure to base their decisions on historic years track record on growth percentage rather than current years growth rate or short-term gain. For example, Templeton India Equity Income Fund is currently considered one of the best dividend yield funds; the fund is giving 34.9% return based on a 3-year compound annual growth rate.
The portfolio allocation of the above dividend fund is well analysed and strategically diversified based on the top equity stocks in the market with larger capitalizations. Another key factor in the portfolio is the stocks that are giving a consistent and good dividend percentage from time to time. For example, Power Grip Corporation has an investment rate of 5.89%, and if we analyse the dividend history of the company, it is very stable and attractive.
Power Grid Corporation Dividend History
Based on the above example, we can conclude that investment needs analysis, focus, and a smart mindset because the current market is open to all with too many financial instruments, but before investing money, investors should have full insight into the hidden charges, liquidation complications, percentage of actual return, and other factors controlled by regulators like SEBI, RBI, etc.
"Successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation's - and, for that matter, the world's - corporations." ~ John C. Bogle
