HDFC Dividend Yield Fund: For Those Looking At Steady Returns

HDFC Dividend yield fund, an open-ended equity scheme has opened for subscription today (November 27, 2020). The scheme is open until December 11, 2020.

It is suitable for those looking at capital appreciation over long term/regular income. HDFC Dividend Yield Fund plans to invest minimum 65% of its assets in dividend yielding companies at the time of investment or companies that chooses to do a buyback in addition of payment of dividend or in lieu of dividend.

This fund will invest in stocks that offer a good dividend yield. Dividend yield is a financial ratio that shows how much a company pays out in dividends/buyback each year relative to its stock price.

Why look at Dividend paying companies?

1) Dividend Yield is a good valuation indicator

2) High Dividend Yielding Stocks represent good cash flow in business and management commitment towards Shareholders

3) Financial health of the company and higher Return on Equity (ROE)

4) Dividend payment requires cash which cannot be manipulated

5) Dividend can be an additional source of return

The right time to invest in dividend yield funds

Lower interest rate generally makes high dividend paying companies attractive. Further, with RBI cutting policy rates over the past few months and maintaining its accommodative stance in the Oct'20 policy meeting, such stocks have become attractive going by the recent history. Currently, 1 year G-sec rate is 3.47% and average dividend yield of NIFTY Dividend Opportunities 50 Index is 3.86%.

The one drawback for the fund is that the stock markets have hit record levels and many dividend yielding stocks have also climbed. This means the attractiveness of valuations has become considerably lower in the last few months. This is a big disadvantage for many mutual funds that are launching their products now. Apart from the timing, there seems to be no issue with the HDFC Dividend Yield Fund.