For investors wanting relative safety in any market cycle, one of the key metrics to be considered is cashflows generated by companies held in their portfolios. These cashflows usually translate to steady dividend payouts, which is a sign of a financially strong company that is returning money to shareholders. Buybacks are also sometimes considered by cash-rich companies for rewarding investors. Usually, the companies paying higher dividends are relatively less volatile and deliver steady rather than spectacular returns.
As frontline indices continue their northward climb, conservative investors may be inclined towards considering dividend yield funds for their portfolio.
In this regard, Baroda BNP Paribas has come out with a new dividend yield fund and the scheme is open for subscription till September 5.
There are five dividend yield funds already with a track record of more than 10 years. So, should investors consider the new Baroda BNP Paribas Dividend Yield fund? Read on to take an informed call.
Reaping dividends
Often, most dividend paying companies are those that have low or no debt – FMCG and IT firms, for example. In addition, we have power utilities, pharma companies, automotive players, MNCs and PSUs that have paid dividends regularly over the past several years.
With steady and sometimes rich cashflows, these companies are able to return cash to shareholders regularly. Therefore, their RoCE (return on capital employed) metric also improves considerably.
Data from the NFO presentation indicates that in the past five financial years, dividend paying companies have recorded much higher return on equity than the other constituents of the Nifty 500. For example, in FY24, dividend paying companies recorded a RoE of 20.5 per cent, while the rest of the Nifty 500 firms delivered 13.4 per cent.
Cash-rich companies are also able to fund capex and growth from internal accruals instead of having to take on debt.
In recent years, buybacks have been on the rise as the full taxation on dividends in recipients’ hands kicked in a few years back. In the recent budget, even buybacks are sought to be taxed from October 2024. So, the advantage of buybacks over dividends has somewhat dimmed.
Baroda BNP Paribas Dividend Yield fund will invest in stocks that pay dividends regularly or have periodic buybacks. The focus will on companies that can deliver growth and are available at a reasonable price. It will follow a flexicap approach in portfolio management.
Avoiding dividend traps wherein stocks have high dividend yields, but experience price declines is another one of the fund’s tasks.
What should investors do?
Currently there are nine dividend yield funds and five of them – as mentioned earlier – have a track record of over 10 years.
Many schemes in the category have found it challenging to beat the Nifty Dividend Opportunities 50 TRI on a point-to-point return basis, more so in the last one year.
Interestingly, when the Nifty 50 TRI and Nifty Dividend Opportunities 50 TRI are compared on a five-year rolling returns basis over the past 10-year period, the former has delivered a slightly better performance than the latter.
Templeton India Equity Income and ICICI Prudential Dividend Yield are best funds in the category with their consistent show. These funds must the first preferred ones in the category.
As a fund house, Baroda BNP Paribas is slowly establishing itself in a few categories.
In general, dividend yielding stocks are usually those with mature businesses. Therefore, investors should not expect growth-portfolio like returns. There can be periods of underperformance. Given the broader market rally over the past few years, the dividend yield theme, too, has benefitted substantially.
Conservative investors can wait for the new dividend yield fund to develop a track record before considering exposure. Those with higher risk appetites, however, can consider small SIPs in the scheme for diversification.
