The Hindu Business Line : Dividend payout

Cash remained king in volatile markets such as the one witnessed this year. Many mutual fund schemes may have realised this, as a good number of them distributed hefty dividends in 2008. Over 80 equity schemes distributed dividends ranging from an insignificant 3 per cent to a whopping 100 per cent of the face value of units between January and October this year.

As many as nine schemes distributed dividends twice during this period. Fund houses such as Birla Sunlife, ICICI Pru and HDFC were among those that had distributed dividends for a number of their equity schemes. Among theme funds, there appeared no specific trend as funds, irrespective of whether they were invested in infrastructure or IT or FMCG, decided to pay out cash to investors. DSPML Technology Fund was among the earliest to declare a dividend of 100 per cent in the first week of January 2008, ahead of the correction.

paper profits to cash

How has such a payout helped investors? Without doubt, it has helped curtail losses by converting paper profits in to cash, even as equity investments eroded in value post the January correction. In contrast, under the growth scheme, all the paper profits would have vanished as NAVs slid on the back of steep market declines. The Table shows the divergence in performance; returns under the dividend payout option have been calculated on the assumption that the dividend received remains in savings bank and also earns nominal interest.

Take the case of DSPML Technology Fund. The fund’s early dividend payout (in January), restricted the year-to-date losses to 40 per cent under the dividend payout scheme, while in the growth scheme it was a painful 56 per cent.

Similarly, the variation between the growth and dividend payout schemes of Kotak Opportunities was a good 13 percentage points, with the dividend payout declining lesser. This fund had declared a total dividend of 80 per cent, in two quick successions — January and March. Funds that had declared dividends in the early part of the year clearly came up with better returns than those that paid out much later.

Dividend payout option may not be the best of strategies to build long-term wealth; while the growth or dividend reinvestment option allows profits to multiply through the power of compounding, dividend payout option results in investors holding cash that is seldom reinvested effectively. However, dividend payout option is suitable for low-risk investors as it allows them to periodically reap the profits made.

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