Principal Dividend Yield Fund: Best Performing Dividend Yield Mutual Fund in last 5 years

As part of SEBI’s directive on mutual fund scheme rationalization and re-classification, some new scheme categories have been created to help investors understand the investment characteristics of different mutual fund schemes and make informed investment decisions. One such new equity mutual fund scheme category is “Dividend Yield Funds”. Previously these mutual fund schemes used to be categorized as diversified equity funds, multi-cap or midcap funds, but the new category definition will help investors understand the special characteristics of this type of mutual funds. Before we discuss what dividend yield funds are, let us understand the term dividend yield.

What is dividend yield?

Dividend yield is the dividend per share paid by a company in a year as a percentage of the share price of the company (Annual dividends ÷ Current share price). Suppose the share price of a company is Rs 100. The company declares a dividend of Rs 10. The dividend yield will be Rs 10 ÷ 100 = 10%. Dividend yield of a stock should be compared to dividend yields of other stocks in the same sector. Dividend yield funds invest in high dividend yield stocks.

Why invest in high dividend yield stocks?

Equity investments are made with the objectives of income (through dividends) and capital gains (share price appreciation). Investors with higher risk appetite prefer capital appreciation, whereas investors with more moderate risk appetites prefer periodic income in form of higher dividends. Stocks which pay high dividends are essentially returning a portion of the capital to the investor on a periodic basis. Through the length of the investment tenor, investor’s risk in high dividend yield stocks reduces over time as a portion of the investment is paid back to the investor in form of dividends, leaving a smaller portion at market risk.

High dividend yield stocks find favor with investors in volatile markets, since investors receive cash-flows even when the share price corrects (falls). High dividend yield stocks are good investment options when equity valuations are high because these provide a margin of safety to investors when the market turns volatile because net downside is limited by high dividends. Hence, these stocks are seen as value stocks. They provide a Dividend yield and are good investment options for investors, who dislike high volatility and want some degree of stability in their investments.

Principal Dividend Yield Fund

Principal Dividend Yield Fund is the best performing dividend yield fund in the last 5 years. It is also the best performing dividend yield fund in the last 3 years and last 1 year respectively (please see the chart below).

Source: Advisorkhoj Research

The fund was launched in 2004 and has Rs 146 Crores of assets under management (AUM). The chart below shows the annual performance of the fund versus its benchmark and the dividend yields fund category over the last 5 years. The performance of the fund in 2017 was stellar.

Source: Advisorkhoj Research

Dhimant Shah has managed this fund for the last 6 years. His tenor as the fund manager coincided with the best performance period for this fund. The chart below shows the NAV growth of the fund over the last 5 years.

Source: Advisorkhoj Research

Rolling Returns

Rolling returns show how a mutual fund scheme has performed versus its benchmark across different market conditions. The chart below shows the 3 year rolling returns of the scheme versus its benchmark over the last 5 years; we have chosen the last 5 year period because it coincides with the tenor of the current fund manager. You can see that the fund manager was able to beat the benchmark most of the times.

Source: Advisorkhoj Rolling Returns versus Benchmark Returns

Let us now see, how the scheme performed versus its peer dividend yield fund schemes. The chart below shows the 3 year rolling returns of the scheme versus the dividend yields fund category. Again you can see that the scheme was able to outperform the dividend yield funds category most of the times in the last 5 years. The outperformance was particularly strong in the last 1 to 2 years.

Source: Advisorkhoj Rolling Return versus Category

The average 3 year rolling return of Principal Dividend Yield Fund over the last 5 years is 15.5%, while the median 3 year rolling return of the fund over the same period is 14.5% - both higher than the category average. The maximum 3 year rolling return of the fund over the last 5 years is 23.7%, while the minimum 3 year rolling return of the fund over the same period is 11.3%. This shows strong performance consistency and stability, for which the fund manager must be complimented. The chart below shows the performance consistency at various levels of returns.

Source: Advisorkhoj Research

Portfolio Construction

The fund manager has a large cap bias – large cap stocks account for 65% of the portfolio. The fund manager’s large cap bias is a sensible strategy in our opinion because midcap and small cap valuations in general have been stretched for quite some time. At the same time the fund manager is overweight on midcap relative to the benchmark index; in the longer term, this may help the fund manager deliver higher alphas to investors. The fund is well diversified across different sectors. The fund is also well diversified from a company concentration standpoint –

Source: Advisorkhoj Research

Lump Sum and SIP returns

The chart below shows the growth of Rs 1 lakh lump sum investment in Principal Dividend Yield Fund (Growth Option) in the last 5 years. Your lump sum investment of Rs 1 lakh in the scheme would have grown to Rs 258,750 in the last 5 years (period ending August 8, 2018), comfortably beating the benchmark index.

Source: Advisorkhoj Research

The chart below shows returns of Rs 5,000 monthly SIP investment in Principal Dividend Yield Fund (Growth Option) in the last 5 years. Your cumulative investment in the last 5 years would have been Rs 3 lakhs, while the value of your investment would have been Rs 467,421 (as on August 8, 2018) – annualized SIP return (XIRR) of more 17%.

Source: Advisorkhoj Research

Conclusion

Principal Dividend Yield Fund has had a terrific 5 year performance run. The strong rolling returns of this fund displays high level of consistency of performance and at the same time, the fund manager has generated high alphas creating wealth for investors.

The dividend yield funds as a product category certainly holds a lot of appeal for investors who want equity returns in the long term but are uncomfortable with high volatilities. After a period of volatility in the earlier part of the year, the market has stabilized and resumed its upward trend. However investors, who are wary of volatility, should also take a note of valuations – Nifty valuation is at an 8 year high. So another round of volatility in the market cannot be ruled out in the near to moderate term.

We had discussed earlier that, dividend yield funds are excellent investment options in times when valuations are high – Principal Dividend Yield Fund is one of the best performing funds in this category. Investors should consult with their financial advisors if Principal Dividend Yield Fund is suitable for their investment needs.