Want Exposure to Dividend Paying Stocks? Consider These Dividend Yield Funds for 2025

As markets navigate a period of uncertainty due to fluctuating global growth and geopolitical tensions, dividend yield funds offer a distinct advantage. They invest in established companies with robust cash flows and a history of dividend payouts. This strategy provides not only income but also a cushion against market downturns.

With inflation showing signs of easing and interest rates stabilising, traditional fixed-income instruments are losing their relative appeal. Dividend Yield Funds bridge the gap, offering equity-linked growth with regular income streams, making them a preferred choice for conservative and moderate investors.

High-dividend paying sectors like financials, utilities, and consumer staples have performed well in 2024, bolstered by a combination of economic recovery and strong demand. Dividend Yield Funds capitalise on this trend, diversifying across sectors to balance growth and stability.

Dividend Yield Funds have been gaining traction among investors seeking consistent returns coupled with growth potential. In this article, we'll delve into what Dividend Yield Funds are, why they could be a valuable investment option, whether 2025 is an opportune time to invest in them, and highlight three top-performing Dividend Yield Funds you may consider.

[Read: Are Dividend Yield Funds Your Best Bet During Volatile Times?]

What Are Dividend Yield Funds?

Dividend Yield Funds are equity-oriented mutual funds that primarily invest in stocks offering attractive dividend yields. A dividend yield is calculated as a company's annual dividend divided by its share price. These funds aim to provide a combination of steady income through dividends and potential capital appreciation over the long term.

The portfolio of Dividend Yield Funds often comprises blue-chip companies with robust financials, a history of consistent dividend payouts, and strong earnings potential. By investing in such funds, investors could access a diversified basket of dividend-paying stocks without directly managing a portfolio.

According to SEBI's categorisation norms, any equity mutual fund scheme predominantly investing in dividend-yielding stocks is classified as a Dividend Yield Fund. In practice, Dividend Yield Funds tend to focus on investing in a portfolio of companies that pay good dividends and have a scope for capital appreciation.

Dividend-paying stocks offer regular income while retaining the potential for capital gains as the stock price appreciates. These funds are generally less volatile compared to growth-oriented funds, as dividend-paying stocks are often more stable during market downturns.

The periodic dividend income acts as a cushion against inflation, providing a steady stream of returns. Gains from Dividend Yield Funds are taxed like other equity mutual funds, making them more tax-efficient than fixed-income instruments.

Is 2025 the Right Time to Invest in Dividend Yield Funds?

As we head into 2025, market dynamics favour Dividend Yield Funds for several reasons:

Stable Economic Outlook: With global economies stabilising post-pandemic, dividend-paying companies are positioned to continue their payouts, offering steady returns to investors.

Rising Market Volatility: During uncertain times, dividend-paying stocks provide a safer haven, balancing risk and return effectively.

Sectoral Performance: Sectors like utilities, IT, and consumer staples, often preferred by Dividend Yield Funds, are expected to perform well due to resilient demand and robust fundamentals.

Attractive Valuations: Post-market corrections in mid-2024 have made valuations in some dividend-heavy sectors appealing, creating a favourable entry point for investors.

Stable Income in Volatile Times: With markets showing increased volatility, these funds offer a dual benefit: steady income through dividends and potential capital appreciation.

Tax Efficiency: Although dividends are taxable in investors' hands, the long-term capital gains tax on these funds is often more favourable than the tax implications of fixed-income instruments.

Dividend Yield Funds thus stand out as a professionally managed avenue to combine the benefits of equity growth and consistent income, especially suited to current market dynamics. Their potential for risk-adjusted returns aligns well with the needs of both conservative and growth-oriented investors.

A deeper analysis reveals that the Price-to-Earnings (P/E) and Price-to-Book Value (PBV) ratios of dividend yield funds have been notably higher compared to their benchmark index.

However, their dividend yields have been significantly lower. This suggests that fund houses do not exclusively rely on value stocks with high dividend yields; instead, they allocate resources to more expensive growth stocks as well.

Funds like ICICI Prudential Dividend Yield Equity Fund and Templeton India Equity Income Fund show relatively moderate PE ratios, indicating a balanced valuation perspective. On the other hand, funds such as Tata Dividend Yield Fund and Baroda BNP Paribas Dividend Yield Fund, with higher PE ratios, reflect a more aggressive growth-oriented strategy.​

In other words, while these funds have demonstrated outperformance, their risk profiles and investment characteristics differ considerably from those of the Nifty Dividend Opportunities 50 Index.

Dividend Yield Funds often appeal to investors seeking higher income through dividends. However, their performance may not always align with expectations. Many of these funds include a significant allocation to growth-oriented stocks, which may dilute their core objective and result in lower dividend yields.

As a result, only a select few Dividend Yield Funds manage to deliver a competitive dividend yield, making it essential for investors to carefully evaluate their choices and ensure the fund aligns with their income-generation goals.

Dividend Yield Funds have shown their mettle in providing better returns compared to broader indices like the NIFTY Dividend Opportunities 50 TRI and Nifty 500 TRI. Over the long term, these funds have also demonstrated strong CAGR figures, such as 25.72% over five years for ICICI Prudential Dividend Yield Equity Fund, highlighting their ability to generate consistent returns.

However, not all Dividend Yield Funds have equally high risk-adjusted returns. For instance, while LIC MF Dividend Yield Fund delivered the highest 1-year absolute return at 52.24%, its Sharpe Ratio of 0.28 suggests lower risk-adjusted efficiency compared to peers like SBI Dividend Yield Fund, which boasts a Sharpe Ratio of 0.59 despite lower absolute returns. This underlines the need for investors to consider both returns and risk metrics when selecting funds.

However, market volatility remains a key concern. While funds like Templeton India Equity Income Fund maintain a relatively balanced risk-return profile with a Sortino ratio of 0.75, others, such as LIC MF Dividend Yield Fund, display higher volatility, as indicated by their Standard Deviation of 15.67%. This suggests that not all Dividend Yield Funds are equally prepared to handle prolonged market turbulence, making risk-adjusted performance a critical factor for investors.

Dividend Yield Funds could act as a rewarding addition to a portfolio, particularly for investors seeking a blend of income and capital appreciation. However, their exposure to growth-oriented stocks introduces variability in dividend yields, necessitating a careful evaluation of fund-specific performance and risk parameters.

Now, to help you navigate the world of dividend-yielding investments, we've curated a list of the 3 best Dividend Yield Funds. These funds are meticulously chosen based on their performance metrics, consistency in delivering high dividend yields, and portfolio quality.

Whether you are seeking steady income, portfolio stability, or long-term growth, these top-performing dividend yield funds stand out as prudent options in today's market.

#1 - ICICI Pru Dividend Yield Equity Fund

Launched in May 2014, the ICICI Pru Dividend Yield Equity Fund focuses on companies with attractive dividend yields, ensuring a steady stream of income while targeting capital appreciation over time.

The average dividend yield of the fund over the last 1 year has been around 1.75%, and the portfolio P/E of the fund is around 30.13x. It deploys a dominant portion (79.58%) of its equity portfolio in large-caps and the remaining (5.99%) in mid-cap and (8.57%) small-cap companies.

The ICICI Prudential Dividend Yield Equity Fund demonstrates a balanced and strategic allocation across sectors, prioritising high-quality, dividend-paying stocks. Key holdings include HDFC Bank (8.35%) and ICICI Bank (7.90%), which anchor the portfolio with financial stability and consistent returns. The fund has consistently performed well over various time horizons, outperforming its benchmark in bullish and bearish market conditions. Investments across multiple high-dividend sectors reduce the risk associated with reliance on a single sector.

ICICI Prudential Dividend Yield Equity Fund offers a robust investment solution for those aiming to combine income stability with growth. It stands out as a strong contender within the dividend yield category, particularly for investors seeking a consistent performance history and value-oriented equity exposure.

The fund is suitable for investors seeking exposure to high-dividend-paying companies as part of a balanced portfolio strategy.

#2 - Aditya Birla SL Dividend Yield Fund

Aditya Birla Sun Life Dividend Yield Fund is a distinctive offering in the dividend yield mutual fund space, focusing on companies with a high potential for dividend payouts and stable earnings. Launched in February 2003, ABSL Dividend Yield Fund currently holds an AUM of Rs 1,536.50 crores.

The scheme's valuation metrics reflect the fund's focus on relatively high dividend yields with an emphasis on sectors offering growth opportunities. The average dividend yield of the fund over the last 1 year has been around 2.74%, and the portfolio P/E of the fund is around 30.52x.

The scheme moderately allocates (55.22%) of its equity portfolio in large-caps and the remaining (10.35%) in mid-cap and heavily invests (24.39%) in small-cap companies. Do note the scheme holds a higher allocation to the segment that is considered price-sensitive & risky.

The allocation reflects a balance between stability and growth, featuring sectors like IT and FMCG for consistent earnings and dividends and cyclicals like mining for potential capital appreciation. This diversified mix enhances the fund's ability to generate steady income while navigating market volatility. The inclusion of government-backed and blue-chip companies underscores its low-risk approach to dividend yield investing.

The fund spans multiple sectors, ensuring risk mitigation and consistent returns. Focusing on businesses with strong earnings potential enhances the stability of dividend payouts. The fund is suitable for investors seeking to diversify their equity portfolio with a focus on dividend-paying stocks.

#3 - Templeton India Equity Income Fund

Templeton India Equity Income Fund is a standout option for investors seeking exposure to high-dividend-paying stocks while maintaining a diversified global and domestic portfolio. Its primary focus is on companies with a strong track record of consistent dividends and solid fundamentals, offering a mix of growth and income.

Launched in May 2006, the scheme currently holds an AUM of Rs 2,398.70 crores. The average dividend yield of the fund over the last 1 year has been around 2.89%, making it a truly Dividend Yield Fund. The portfolio P/E of the fund is around 25.21x.

It deploys a significant portion (56.02%) of its equity portfolio in large-caps and the remaining (5.89%) in mid-cap and (12.94%) in small-cap companies.

Unlike many domestic-focused funds, this fund allocates a portion of its portfolio to international equities, leveraging opportunities in developed and emerging markets to enhance returns and reduce domestic market dependency.

The fund has invested in overseas equities such as Xtep International Holdings Ltd., Cognizant Technology Solutions Corporation, Xinyi Solar Holdings Ltd., MediaTek Inc., etc. In total, the fund has held around 42 stocks in its portfolio and has been gradually increasing its exposure to utility companies and energy stocks.

The fund's portfolio is well-diversified across sectors, balancing defensive sectors like utilities and consumer staples with growth-oriented sectors like IT and healthcare. This mix enhances stability and income generation while offering growth prospects. Its global allocation provides exposure to international markets, reducing the impact of domestic volatility.

Investors looking for global equity exposure to diversify their portfolios and aiming to hedge against market volatility while benefiting from steady payouts may find this fund appealing. Templeton India Equity Income Fund is a solid choice for investors looking to combine the benefits of global diversification, dividend income, and long-term value growth.

To conclude...

Looking ahead, the future performance of these funds will depend on macroeconomic factors like interest rates, inflation, and corporate earnings growth. High dividend-paying companies, often considered defensive bets, may continue to attract investors in a high-inflation environment, given their stable cash flows and potential for consistent payouts.

However, as markets mature, the growth-oriented exposure in many Dividend Yield Funds could result in more pronounced volatility. For long-term investors, Dividend Yield Funds remain a viable option, especially for those seeking a combination of income and capital appreciation.

Remember, careful fund selection, based on performance metrics and risk assessment, is crucial to aligning investments with financial goals amidst an evolving market landscape.

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MITALI DHOKE is a Research Analyst at PersonalFN. She is an MBA (Finance) and a post-graduate in commerce (M. Com). She focuses primarily on covering articles around mutual funds including NFOs, financial planning and fixed-income products. Mitali holds an overall experience of 4 years in the financial services industry.
She also actively contributes towards content creation for PersonalFN’s social media platforms in the endeavour to educate investors and enhance their financial knowledge.
 

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.