For those of you who believe in investing to earn dividends, but do not have the time to study stocks, there are now three schemes in the market that will do the work for you.
And all these schemes offer you a choice of growth and dividend options. While the dividend is tax-free the capital appreciation is taxed depending on whether the units have been held for the long or short term.
Essentially, a dividend yield scheme invests in stocks which offer a dividend yield above a minimum level. For instance, in the case of Birla Dividend Yield Plus, the criterion is that it should be two times the BSE Sensex yield which is currently at 2 per cent, while for Principal Dividend Yield, it should be a minimum of 1.5 times the Nifty Yield. For Tata Dividend Yield scheme, the yield has to be simply higher than that of the Bombay Stock Exchange Sensex.
Historically, dividend paying companies have had a good financial track record and have shown good capital appreciation. Observes A Balasubramanian, head, business development, Birla SunLife, the stock selection in such a scheme is conservative since unless a company is fundamentally in good shape with strong cash flows, it will not be able to pay out dividends.
"The average dividend yield of stocks selected by us is around 4.5 per cent," says Deven Sangoi, fund manger Birla SunLife, adding that there are enough quality stocks to buy into. The scheme has given investors a return of 150 per cent since inception in February 2003, for the growth option.
The advantage of investing in a dividend yield scheme according to Rajat Jain, CIO, Principal PNB AMC, is that one can hope for both some capital appreciation as also dividend. However, there could be a depreciation in the value of the stock in which case the dividend would act as a cushion.
"The idea is to invest in some value stocks and therefore an investor may have to hold the scheme for some time to earn a return, since there could be some periods when the market does not fancy value stocks," says Jain, adding that the value will definitely get unlocked at some point. Jain observes that the two sources of cash flows-capital appreciation and dividends, makes the scheme less volatile.
With a lenient cut off yield, the Tata scheme, does not appear to be too different from a diversified scheme since the universe of stocks that can be bought into would be relatively high.
However, V P Chaturvedi, MD, Tata AMC, justifies the criterion, saying that the average dividend yield of the market has been coming down and that focus of the scheme will be on high dividend stocks.Powered by 
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