Livemint, Dec 1, 2020
Dividend yield may also be high for stocks that have modest dividends but may have seen prices crash
In sync with the recent tilt towards thematic funds, HDFC Mutual Fund launched HDFC Dividend Yield Fund last week. Dividend yield is the ratio of dividend per share to price per share. It can be high because a company is paying high dividends or the stock price has dropped.
Usually companies which pay high dividends are mature businesses. Dividend yield may also be high for stocks that have modest dividends but may have seen prices crash. Public sector companies are also well represented in terms of dividend yield as the government relies on dividends from them for budgetary needs.
“Dividend yield companies are those which are mature, have a stable business model, and relatively high cash flow and are less volatile,” said Gopal Agrawal, fund manager, HDFC Dividend Yield Fund, in a video presentation about the scheme. A low interest rate environment also favours dividend yield investing, he added, comparing one-year G-secs (government securities) yield with the dividend yield of the Nifty 50 Dividend Opportunities Index. The G-secs yield gap above the dividend index has shrunk from 5.5% in 2011 to -0.4% now, he noted, implying a favourable return. According to Agrawal, the valuation gap between the dividend index and the Nifty 50 has also risen to multi-year highs.
The abolition of dividend distribution tax (DDT) has made this style more rewarding for investors. DDT was earlier charged at an effective rate of 20.56% and is now no longer taxable in the hands of the mutual fund. Individuals holding shares and receiving dividends have to pay tax at their slab rate. This effectively creates a tax arbitrage if you hold stocks through mutual funds.
Since dividend yield investing tends to pick up cheap, out-of-flavour companies, this strategy has floundered over the past three to five years. The market has rewarded high performers and punished the underdogs. According to data from Value Research, the dividend yield category has delivered a compounded annual growth rate of 8.23% over the past five years and 2.34% over the past three years, as on 27 November. This compares to 11.35% and 6.80%, respectively, by S&P BSE 500 (TRI).
The strategy is likely to replicate HDFC MF CIO Prashant Jain’s penchant for investing in PSU and value stocks, in other schemes of the AMC. “Considering that companies in this space enjoy certain advantages, especially in capital-intensive and natural-resources-led businesses, coupled with stable or improving financial performance, we believe it presents a good opportunity. The recent underperformance of these companies has made their dividend yield attractive and few are even trading at one-to -two times the current 10-year G-sec yields,” said Agrawal, in response to Mint, referring to PSU stocks.
“Dividend yields are often high because prices are low. The markets have rewarded growth rather than cheap value picks over the past several years and we have no reason to believe that this cycle will change. The AMC broadly follows a similar value strategy in other funds, so there’s nothing new,” said Prateek Pant, co-founder and head of products and solutions at Sanctum Wealth Management, a mutual fund distribution firm.