In our obsession for capital gains, most of us do not realize that dividends are also an important part of the returns on equity. Dividend yield is the dividend per share dividend by the market price. It tells us how much returns an investor will earn purely from dividends, assuming that capital gains do not generate anything. One way to look at the contribution of dividend yields is to look at the difference between the normal returns and the TRI returns of the Nifty 500 index. For example, an investment of ₹1 Lakh in the Nifty 500 index in the year 2000 would have grown to ₹18 Lakhs today.
However, if you consider the Nifty 500 TRI (which also factors dividends), then the same ₹1 Lakh would have grown to ₹26 Lakhs. In short the dividend yield has boosted the CAGR returns on the Nifty 500 from 12.5% to 14.2% over the last 24 year period. In the above case, nearly one-third of the total value generated by the Nifty 500 TRI index in the last 24 years comes from dividend and only the balance two-third comes from capital appreciation in the stock. That is how critical dividend yield is to the returns on equities.
DIVIDENDS ARE ACTUALLY GOOD FOR COMPANY HEALTH
There is a popular fallacy that companies paying high dividend yields tend to stagnate in price. That is not necessarily true. Here is why dividend yield can be value accretive.
Dividends and taxes are two classic signals that the cash flows of the company are for real and not made up. That is a key signal that the dividend payout generates.
Most high dividend paying companies have strong cash flows, which means that the debt levels of the company would also be low. Strong dividend yield is a good proxy.
Since dividends distributes the idle cash, it does not unnecessary bloat the capital base. This improves the ROE and the ROCE of the company in question.
It is a myth that all high dividend paying companies are stagnating companies. In the last 2 years, oil and PSU banks have given sold dividend yield and capital gains too.
A solid dividend yield of around 3.5% to 4.0% acts as a valuation floor for the company. You don’t find high dividend yield companies falling too sharply even in a crash.
The big edge that high dividend paying companies offer is that they signal a company that has strong free cash flows (FCF).
DIVIDEND YIELD DELIVERS ON RISK AND ON RETURNS
As an investing idea, dividend yield not only enhances the returns but also reduces the risk, making a better story of risk adjusted returns. Here are a few live instances.
If you compare the ROE of high dividend companies with the other companies in the Nifty 500 index, the high dividend paying companies have given better ROE in each of the last 5 years. In FY23 and FY24, the ROE of dividend paying companies was 700 bps higher than the ROE of the other companies.
If you compare the Dividend Opportunities with the Nifty 500 index, then the P/E ratio of the former has been consistently lower than that of the latter. This is despite delivering higher dividend yields, hinting at better valuation metrics for such dividend yield stocks as an investment option.
An investment of ₹1 Lakh in the Nifty Dividend Opportunities 50 TRI in 2007 would have grown to ₹10.40 Lakhs in 2024. The same would have grown to just ₹6.70 Lakhs for the Nifty 500 TRI. More importantly, the Nifty Dividend Opportunities 50 TRI had a lower standard deviation of 17.13% and a lower beta of 0.82 as compared to 18.67 and 0.96 respectively for the Nifty 500 TRI. That is much better risk-adjusted returns.
Let us take a quick look at how Baroda BNP Paribas Dividend Yield Fund will go about stock selection.
HOW THE STOCK SELECTION WILL BE DONE FOR THE FUND
The stock selection for the Baroda BNP Paribas Dividend Yield Fund will be based on the following criteria.
It will focus on companies with steady and consistent track record of dividend payments and stock buybacks.
The focus will largely be on companies that are able to generate high levels of free cash flows (FCF) on a consistent basis.
The fund will be careful to avoid dividend traps. These include special dividends, dividends out of sale of assets, dividend out of capital, one-time dividend etc.
In terms of capitalization, the portfolio will be largely market cap agnostic. It will select stocks from large caps, mid-caps and small caps that fit the dividend yield criteria.
Of course, the margin of safety will be an issue. The fund will look for great dividend yield companies that are available at an attractive price point.
Historically, a dividend yield approach with the checks and balances, exposes you to a portfolio of high quality stocks with robust cash flows.
PERFORMANCE OF DIVIDEND YIELD FUNDS IN INDIA
Here is a quick look at how the dividend yield funds in India performed over 1-year, 3-years, and since inception. We have considered the direct plans to avoid the distortion of total expense ratio (TER) differentials. There are 9 such active dividend yield funds in India, of which we have ranked them based on 1 year returns. In all cases, the growth option has been taken as the benchmark to eliminate the reinvestment risk. Here are the 9 dividend yield funds in India ranked on 1 year returns.
Scheme
Name
NAV
(in ₹)
Return (%)
1-Year
Return (%)
3-Year
Return (%)
Launch
Daily AUM
(₹ in Crore)
LIC MF Dividend Yield Fund
33.71
62.78
26.92
24.84
368.67
ICICI Prudential Dividend Yield Fund
57.39
55.66
31.53
18.53
4,725.70
Aditya Birla Sun Life Dividend Yield Fund
524.71
54.87
27.82
15.71
1,578.86
Templeton India Equity Income Fund
160.61
54.15
26.74
17.99
2,523.05
UTI Dividend Yield Fund
197.20
54.13
22.42
15.99
4,406.28
Sundaram Dividend Yield Fund
153.92
46.36
21.44
16.23
970.8
HDFC Dividend Yield Fund
27.35
46.25
28.05
31.42
6,095.20
SBI Dividend Yield Fund
16.04
41.04
N.A.
38.65
9,277.34
Tata Dividend Yield Fund
19.64
40.95
22.93
22.98
1,025.95
Data Source: AMFI
The table above provides the performance of dividend funds in India, over 1-year, 3-years, and since inception. There are a total of 9 active dividend yield funds in India managing a combined corpus of ₹30,972 Crore between them. Here are some key takeaways.
Let us first look at the returns on dividend yield funds over a 1-year period. On a 1-year returns basis, these dividend yield funds generated maximum returns of 62.78% and minimum returns of 40.95%, which is a fairly attractive worst-case scenario. The average returns over a 1 year period were 50.69%, which is impressive. There was a 100% probability of being in the best performing asset class in dividend yield funds in India.
Let us first look at the returns on dividend yield funds over a 3-year period. On a 3-year returns basis, these dividend yield funds generated maximum returns of 31.53% CAGR and minimum returns of 21.44% CAGR , which is a healthy worst-case scenario. The average returns over a 1 year period were impressive at 25.98%. There was a 100% probability of being in the best performing asset class over a 3-year period.
Let us first look at the returns on dividend yield funds since launch. These dividend yield funds generated maximum returns of 38.65% CAGR and minimum returns of 15.74% CAGR , which is a healthy worst-case scenario. The average returns over a 1 year period were impressive at 22.48%.
Let us look at the break-up of the winners among dividend yield funds. If you look at 1-year returns, 5 out of the 9 dividend yield funds earned more than the average. Over a 3-year period, 5 out of 8 funds earned more than the average, with one fund not having the 3-year track. On the basis of returns since inception, only 4 out of 9 funds did better than the average, which could be attributed to the higher dispersion.
Dividend yield as a theme may not have attracted a lot of flows, but surely there is a strong case to invest in a dividend yield fund.
GLANCE AT THE BARODA BNP PARIBAS DIVIDEND YIELD FUND NFO
Here are some details of the Baroda BNP Paribas Dividend Yield Fund NFO you must know to decide on investing in the fund.
The NFO of Baroda BNP Paribas Dividend Yield Fund opened for subscription on August 22, 2024 and will close on September 05, 2024. Being an open-ended active fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. The Baroda BNP Paribas Dividend Yield Fund is best suited to investors looking for medium to short term outperformance in stable dividend yield stocks. The dividend yield also acts as a valuation defence mechanism.
The core focus of the Baroda BNP Paribas Dividend Yield Fund is to invest in attractive dividend yield stocks with strong positive cash flows with a view to creating long term wealth for shareholders. The focus will be on long-term capital appreciation, through a focus on attractive dividends, strong free cash flows and buyback candidates. A holding period of 5-7 years at the bare minimum would be required to realize the full benefits.
On the Standard SEBI Risk-O-Meter, the Baroda BNP Paribas Dividend Yield Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities (65% to 100%) that the Baroda BNP Paribas Dividend Yield Fund will have. In addition, there is the risk of entering into the markets at lifetime highs as well as the risk that stock selection by the fund manages may not yield the desired results.
The Baroda BNP Paribas Dividend Yield Fund is about generating long term capital growth with carefully selected portfolio of stocks with high dividend yield and strong free cash flows. While the allocation will be discretionary, the theme is clearly defined. It will have an agnostic mix of large caps, mid-caps, and small caps in the overall portfolio, since the focus is less on capitalization and more on dividend yield. The fund will offer growth option and the IDCW option to investors.
Investors can invest in the NFO of Baroda BNP Paribas Dividend Yield Fund in minimum size of ₹1,000 lumpsum and in multiples of ₹1 thereof. This also applies to additional purchases and switch-ins. The fund also supports the systematic investment plans (SIPs), systematic withdrawal plans (SWP), and the systematic transfer plans (STPs) programs on a structured and long term basis. Daily, weekly, and monthly SIPs will have to be of a minimum of ₹500 while quarterly SIPs should be of a minimum size of ₹1,500.
There is no entry load, and the exit load will be conditional. Firstly, there will be no exit load on any redemption after 1 year from the date of allotment. Secondly, any redemption, even within 1 year, up to 10% of the units are exempt from exit load. Thirdly, if the redemption is before 1 year and beyond 10% of the units allotted, then an exit load of 1% of the applicable NAV will be levied to protect the interests of continuing investors in the fund.
The Baroda BNP Paribas Dividend Yield Fund does not give any guarantee on returns and the performance of the fund is subject to the vagaries of the markets in general and the performance of the Nifty 500 index in particular. The Baroda BNP Paribas Dividend Yield Fund will be benchmarked to the Nifty 500 TRI, which the fund managers will seek to beat to generate alpha. However, outperformance is subject to the market conditions and an outcome of the decisions of the fund manager.
The Baroda BNP Paribas Dividend Yield Fund will be managed by Shiv Chanani and his team. Miten Vora will focus purely on overseas investments. The intent of the fund management team will be beat the Nifty 500 TRI and generate alpha for the investors. KFIN Technologies Ltd will be the registrars to the fund.
The Baroda BNP Paribas Dividend Yield Fund NFO offers an opportunity for investors to participate in the upside opportunity of Indian equities with strong free cash flows and stable and attractive dividend yields.
TAX TREATMENT FOR BARODA BNP PARIBAS DIVIDEND YIELD FUND
Post the Union Budget announced on July 23, 2024; there are some key changes to the way the returns earned on the Baroda BNP Paribas Dividend Yield Fund will be taxed. Being an equity index equal weight fund, it will be taxed at par with equities under the Income Tax Act.
The demarcation holding period for short term and long term capital gains is 1 year. If the Baroda BNP Paribas Dividend Yield Fund is held for 1 year or more, it will qualify as long term capital gains. Capital losses can be written off against gains and also carried forward.
The dividends declared by the fund, if any, will be taxed at peak rate of tax applicable. In addition, if the overall dividends exceed ₹5,000 in a year, they will be subject to tax deduction at source (TDS), under the extant income tax rules.
STCG tax treatment has undergone a change in the July 23, 2024 Union Budget. The short term capital gains on units sold before 1 year will be taxed at 20% on gains plus cess at 4%, making effective STCG rate 20.80%. It was raised from the old rate of 15%.
The LTCG will be taxed at a flat rate of 12.5% (up from 10%). However, threshold exemption limit has also been increased from ₹1 Lakh to ₹1.25 Lakhs. Even in this case, the actual tax impact will be 13% after including the 4% cess.
Investors need to factor in the changed taxation rules before investing in the Baroda BNP Paribas Dividend Yield Fund and understand the implications on post-tax returns.
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