MF Tracker: Does this MF investment yield dividends?

Dividend investing is a classical investment strategy, where equity investments are valued considering the frequent dividend pay-outs from the company, amongst other valuation metrics. More than the pay-out, the regular yield is viewed by investors to provide a minimum threshold for valuations and hence acting as valuation floor in tough times. In a volatile period, for instance, for a company paying dividends, a 50 per cent drop in price implies doubling of the dividend yield. This provides the equity instrument with partial features of fixed income asset-class if it breaches 6-7 per cent dividend yield, enhancing its value for some investors.

In the mutual funds space, there are eight funds — all actively managed and focussed on dividend yield strategy. As per expectations, the funds should hold the draw-down in a weak equity market period and provide regular growth in other times, owing to their dividend strategy. We assessed the five funds, with more than eight-year track record, to test such assertions. The funds can limit draw-downs in tough times, but as with any active fund, the absolute returns through good and bad times do make a case for considering this MF category.

Strategy and holdings

The thematic funds are equity funds (65 per cent minimum equity allocation) investing in dividend-yielding stocks. The yield cut-off doesn’t exist in the segment, but Sundaram Dividend Yield fund mentions picking companies with dividend yield above the lowest yield in Nifty Dividend Opportunities 50 index (1.04 per cent for Nestle). This index is also the benchmark for Sundaram, UTI Dividend Yield and Aditya Birla Sun Life (ABSL) Dividend Yield fund, while Templeton India Equity Income and ICICI Prudential (ICICI Pru) Dividend funds have Nifty 500 TRI as the benchmarks. Having dividend yield as the theme ensures a wide basket of investible universe, which could explain the two benchmarks in the segment.

Cushion

In February-March 2020, while the Nifty 500 declined 35 per cent, dividend yield funds and Nifty Dividend 50 index contained losses better at 29-32 per cent fall

The funds have largest exposure to the technology sector, where generally the mature companies tend to pay out a large portion of their free cash flows annually in the form of dividends and buybacks. UTI has the highest exposure at 25 per cent and Templeton the least with 16 per cent, according to the latest monthly filings. Templeton has more than a third invested in the energy sector, compared to a range of 10-15 per cent for others. Considering the expectation of fading growth in technology, Templeton may have positioned itself early on for the next cycle. Going by credit growth expectations and cleaner balance sheets, the financials sector is also expected to be a growth driver and ICICI Pru has 20 per cent weightage in the segment compared to only 1 per cent for Templeton. Consumer staples is the other big sector marked out for future growth and is led by 20 per cent allocation for UTI and negligible allocation for ICICI Pru.

The category funds largely stick to 70/20/10 large-mid-small cap categorisation with ABSL’s small-cap allocation at 21 per cent being the exception at the cost of large-cap allocation (55 per cent). With economic outlook being speculated to anything but clear blue skies, ABSL’s high small-cap allocation can be a potential risk.

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Fund performance across periods

We have considered four distinct periods over the last seven years to analyse fund performance of these funds compared to both the benchmarks (Nifty Dividend 50 index and Nifty 500 index). The recent YTD performance (January 2022 to October 2022), the bull market phase (March 2020 to January 2022), the Covid fall (February 2020 to March 2020) and the relatively normal period of February 2015 to February 2020. In the five years between 2015 and 2020 without any black swan event, Sundaram outperformed (50 per cent gain) all indices and other funds whose gains ranged between 9 per cent and 33 per cent. The Covid period witnessed declines of 35 per cent at Nifty 500, but the funds and Nifty Dividend 50 ranged between declines of 29 per cent and 32 per cent. This supports the thesis of downside protection on a relative basis, but not by a huge margin.

In the follow-on bull phase (Nifty 500/Nifty Dividend 50 indices gained 144/117 per cent) ICICI Pru and Templeton inched over the others and the benchmarks with returns of 161 per cent and 166 per cent, and the other three funds ranged between 131 per cent and 140 per cent as well. The market’s sideways movement YTD was matched by the other funds, except UTI fund which declined by 8 per cent, while others including indices ranged between -4 per cent and 3 per cent.

Overall, from 2015-2022 Templeton (138 per cent), Sundaram (134 per cent) and ICIC Pru (120 per cent) managed to beat Nifty 500 index (108 per cent). While ABSL (73 per cent) and UTI (98 per cent) dividend funds managed to beat Nifty Dividend 50 index (68 per cent) reinforcing the active management style in this segment, even as overall performance fell short of the broader index.