Today, while investors in equity are looking to protect their portfolios from capital erosion, debt investors are looking to add a booster dose to their diminishing debt income.
Dividend yield stocks look to be answer for both. Realising the need, a number of fund houses have been launching mutual fund schemes that will invest in dividend-yield stocks.
What is dividend yield? In simple parlance, it is the return one earns by way of dividend from shares. It is calculated as the ratio (expressed as percentage) of total dividend per share declared for previous accounting year to the market price of the share at the time of investment.
For example, if the market price of a scrip is Rs 50 and the total dividend declared in the last accounting is 40 per cent (Rs 4 on the face value of Rs 10), the dividend yield of a scrip is 8 per cent , that is, 4/50*100).
So how does a portfolio of dividend yield stocks help? Simply put, the strategy aims to avail the triple benefits of dividend income, downside risk management and potential for capital appreciation.
A high dividend payout in general implies that there is enough cash generation by the business. Thus, it is an indication that the stock is under-priced in spite of high cash generating ability. Also, investment in stocks with high dividend yields is traditionally considered a "defensive investment strategy."
Historically, evidence shows that in falling equity markets, high dividend yield stocks provide greater degree of protection to investors than other stocks. Not just that, the stocks show good possibilities of capital appreciation in a reviving market.
So an investment in these stocks in bearish market could unlock significant value as and when the market picks up. A careful selection of high dividend yield stocks in a portfolio could therefore unlock significant value, which would eventually reflect in growth of net asset value of the scheme. Currently, there are three dividend yield funds available- one each from Birla, Tata and Principal.