FundsIndia Reviews: NFO of ICICI Pru Dividend Yield Equity Fund

May 5, 2014 . Vidya Bala

ICICI Prudential Mutual is probably a late entrant to the dividend yield theme. But the current NFO from the fund house appears to be timed well, if the dividend yield in the market is any indication.

ICICI Pru Dividend Yield Equity is the new open-ended equity scheme from ICICI Pru AMC. This fund will seek to invest at least 80% of its assets in stocks of companies with dividend yield higher than that of the CNX Nifty’s dividend yield (dividend yield of CNX Nifty is at present 1.42%).

The fund will close its new fund offer period on May 9 and will thereafter reopen for buying on an ongoing basis.

The Theme

Dividend yield as a theme has known to work quite well in volatile or down markets. This is because dividend yield stocks typically come from either of these following segments: one, universe of companies that are cash rich, have stable businesses (FMCG, IT, PSUs for instance) and can weather a downturn reasonably well.

Two, companies or sectors that are trading at lower valuations (and cannot therefore fall much further), being out of favour in the market for temporary reasons (oil and gas or banking stocks last year).

Any which way, these stocks seek to provide some stability on one hand and also participate in the initial leg of rally (especially the ones with lower valuations) in a recovery either in the economy or certain sectors.

As a theme, dividend yield delivered exceedingly well between 2008-2012, with the CNX Dividend Opportunities Index beating the CNX Nifty as well as the broader index, CNX 500 index (except in 2012), in every one of the calendar years from 2008 to 2012.

However, 2013 turned out to be a poor one for the theme as many of the dividend yield stocks in sectors such as FMCG either turned expensive or were beaten down as a result of earnings concern (banks, power stocks for instance).

As a result, the dividend yield of the CNX Dividend Opportunities Index, at 3.22% is higher than it was 3 years ago and has only marginally declined from 3.24% in August 2013, despite the swift market rally from September 2013 till date.

div yield1

The chart above shows the sharp increase in the dividend yield of this index and also the steep fall in the price earnings ratio from 13.4 times to 11.4 times (the blue line in the chart).

This suggests that dividend yield stocks are available at low valuations and may provide reasonable returns when they pick up. The rally in these stocks, of course, has begun in pockets from end-November 2013.

Funds in the Space

There are at least 6 funds with a 5-year track record in this space and a recent index fund from IIFL AMC and an ETF from Reliance Mutual.div yield2

The graph here shows the calendar year return of these funds that suggest that in years of downturn and years of recovery, dividend yield funds have beaten the bellwether index as well as broad markets. 2013 was an exception, for reasons earlier stated.


The Fund

ICICI Pru Dividend Yield Equity will invest across market cap segments/sectors where dividend yield opportunity arises. We would think that currently, a good number of banking stocks, oil and gas stocks and select IT stocks may be ripe to pick based on dividend yield.

As a theme, dividend yield is suitable only for buy and hold for a long-term portfolio. It seeks to provide reasonable returns with limited volatility and can be added in a portfolio which already has large-cap and diversified funds.

ICICI Pru Dividend Yield Equity
will be managed by Mrinal Singh (who also manages ICICI Pru Discovery) and Vinay Sharma. The fund will be benchmarked against the CNX Dividend Opportunities Index.

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