HDFC Dividend Yield NFO review: Should you invest?

When bellwether indices are at all-time highs, most investors would like to invest in a portfolio of quality stocks, which may contain downsides. Dividend yield investing can be one such strategy explored by investors, wherein they get to buy stocks of companies offering regular cash payouts, and trade at attractive valuations. HDFC Mutual Fund has joined this trend by rolling out a new HDFC Dividend Yield Fund (HDYF).

What’s on offer

The scheme aims to provide capital appreciation and/or dividend distribution by predominantly investing in a well-diversified portfolio of high dividend-yielding stocks. The dividend yield of a stock is expected to be higher than that of the Nifty 50. HDYF will be investing at least 65 percent of its corpus in such companies. The scheme can invest up to 35 percent of the assets in bonds.

The fund manager will select stocks of companies that have paid a dividend or have done a buyback at least once in the preceding three years. Consistent dividend-paying companies will be preferred. The scheme will be sector agnostic and will invest in stocks of companies of all sizes. Gopal Agarwal will manage HDYF. The scheme’s performance will be benchmarked against the Nifty Dividend Yield Opportunities 50 TRI.

What works

Dividend yield is calculated by dividing the dividend amount per share by the market price of the stock. A portfolio with high dividend yield stocks may work in favour of investors in volatile markets. Companies generating cash flows consistently are considered financially superior to others that fail to do so.

Some companies prefer to give the cash back to investors by way of dividends. In tough times, these act as anchors to the portfolio. For example, Nifty Dividend Opportunities 50 TRI has gained 12.22 percent compared to Nifty 50 TRI that has gained 10.9 percent this year. The dividend index on the way down lost only 31 percent since the beginning of the year when Nifty 50 TRI hit the low by falling 37.2 percent in March 2020.

The conscious strategy of the scheme to focus on shares of companies with growing profits and consistent cash generation should ensure that the fund manager stays light on firms of most public sector undertakings, despite the high dividend yield that they provide.

Dividend yield portfolios tend to be less volatile and are a good choice in a low interest rate phase such as the one we are going through. Dividend yield for Nifty 50 TRI stands at 1.19 percent; for Nifty Dividend Opportunities TRI, it stands at 3.36 percent.

What does not work

Dividend yield portfolios typically exclude companies that do not pay dividends. Companies in a high-growth phase may want to conserve capital and may not pay dividends. Typically, equity markets reward companies that demonstrate growth, even if they are well-established and large-sized firms.

Five fund houses offer dividend yield schemes now. In the last three and five-year periods, dividend yield funds have given 3.93 percent and 9.54 percent, respectively, as per Value Research data. Multi-cap funds delivered 6.3 per cent and 10.66 percent over these periods. In the past few years, the equity markets have rewarded growth companies. The value strategy hasn’t done well in recent years.

The year of 2020 has been different on account of market volatility due to COVID-19 uncertainty. This year, dividend yield funds gave 15.06 percent and outperformed multi-cap schemes that gave 11.26 percent returns.

“Dividend yield funds should not be a part of your core equity portfolio. If you are keen on this strategy, then some allocation can be made only in the satellite portfolio, if you understand the theme well,” says Amol Joshi, founder of Plan Rupee Investment Managers.

What should you do?

Dividend yield and value funds have underperformed over the last five years, as investors preferred taking the growth strategy all over the world. Shares of many public sector companies offering attractive dividend yield saw their prices fall due to sustained overhang of the disinvestment programme of the Government of India, making dividend yield funds investing in such companies, give relatively poor returns.

Gopal Agarwal comes with a good track record. But a dividend yield strategy, and especially a new scheme, can be avoided at this time.

The new fund offer will close on December 11, 2020.