SBI Dividend Yield Fund NFO opens: Should you invest?

SBI Dividend Yield Fund NFO

After launching four debt schemes in a row, SBI Mutual Fund, the largest fund house in the country, has unveiled its maiden equity offering for CY2023, the SBI Dividend Yield Fund (SDF). The new fund offer (NFO) opened on February 20, 2023.

What is on offer?

SDF’s objective is to build a diversified portfolio of dividend-paying stocks. The scheme is managed by Rohit Shimpi and the performance of the scheme is benchmarked against the Nifty 500 TRI. The fund manager has to invest a minimum 65 percent of the money in dividend-paying companies. The scheme plans to build the portfolio in such a manner that the overall dividend yield of the portfolio is at least 50 percent more than that offered by Nifty50.

What works?

The dividend-yield strategy has been around for some time. For beginners, the dividend yield is computed by dividend per share by price per share. So, if a share with a price of Rs 100 pays out a dividend of Rs 4, the dividend yield works out to 4 percent. Higher the dividend yield of a stock, the more attractively valued it is, says old wisdom.

A portfolio, comprising stocks which are quoting at a relatively high dividend yield, is expected to fall less in turbulent times. Dividend payouts not only leave cash in the hands of shareholders from time to time, they also make stocks attractive when markets fall and investors start looking for attractive bets. Many consistent dividend-paying companies are seen as well-established businesses and savvy investors would like to latch upon them if they expect the earnings to grow over a period of time.

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SDF is trying to build a portfolio of stocks of companies across market capitalisation that are attractively valued in terms of dividend yield and exhibit potential for growth in dividends.

Dividend yield portfolios are generally diversified across sectors, which further reduces sector-specific risks that are rather prominent in sectoral or thematic funds. A look at the Nifty Dividend Opportunities 50 Index, a close representative of the dividend yield strategy, houses companies spread across sectors such as information technology, fast moving consumer goods, oil & gas, construction, power, metals & mining, and financial services.

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D P Singh, Deputy MD and Chief Business Officer, SBI Mutual Fund, said, “High dividend yield companies are generally thought of only from the angle of providing regular income, but many of them are strong growth-oriented businesses across market cap with the potential of long-term wealth creation.”

Over a long term, such a portfolio can reward investors who are keen on having exposure to stocks with relatively less volatility.

“Dividend strategy has worked well in rising interest rates and difficult market environments and suits conservative investors looking for relatively low volatility,” says Ravi Kumar TV, Founder of Gaining Ground Investment Services.

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“The strategy may see periods of underperformance and hence works only for long-term investors,” he adds.

What does not work?

Not all companies would like to distribute cash they generate in the course of business. Many companies in high-growth phases would like to reinvest the cash on hand, instead of giving it back to investors. Such companies may be missed when the investor is focused on dividend yield.

In a fast-paced bull market, investors may want to chase growth and overlook dividend yield. This is especially true about new-age businesses in emerging sectors, which may not be paying dividends at all.

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Abhay Mathure, a Mumbai-based mutual fund distributor prefers to stay away from most NFOs. “Dividend yield strategy has sprung back with good numbers in the recent past. However, it is better to stay with a growth-focused well diversified scheme in a growth market such as India,” he said. If you are keen on regular income, invest in the IDCW (Income Distribution cum Capital Withdrawal; erstwhile dividend) option of such a scheme, he added.

What should investors do?

Dividend-yield funds are not new. Some of the schemes in the category have been around for more than a decade. Eight dividend yield schemes together manage Rs 10,244 crore. Over the last three years that ended on February 17, 2023, dividend yield schemes have given returns of 19.23 percent, compared to 13.77 percent given by flexi-cap funds, as per Value Research.

Dividend yield funds and value funds have come out of the woods, after the 2020 crash in the stock market. Experts estimate that value funds may continue to do well on expectations of increased volatility. However, do not expect such a wide outperformance to continue forever.

Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors, says, “Though value as an investment style has come back after a long gap, there is no compelling reason to go for a dividend yield NFO. We prefer value funds with a track record, if an investor wants to take exposure to value investing.”

Investors are generally better off investing in well-managed schemes with a track record.

Within dividend yield funds, Kumar prefers existing dividend yield schemes such as Templeton India Equity Income Fund. Equity investors keen on relatively less volatility may consider investments in dividend yield strategy. Aggressive investors as well as those who are comfortable holding on to their investments across market cycles can steer clear of dividend yield schemes and focus on other diversified equity schemes depending on their risk appetite.

The NFO closes on March 6, 2023.