Dividend Growth Investing

Question: why go the mutual fund route for dividend growth in the first place? The dividend paid to investors is adjusted from the scheme NAV. Therefore, you will see a drop in NAV (ex-dividend NAV) of your scheme after you receive dividend (quoted from Mirae). Its as good as selling shares/units : doesnt serve the purpose of dividend growth strategy of not selling shares for income

You should choose the Growth option, not Dividend option. That you dividends will be reinvested and you get the compounding effect in NAV. Choose a MF whose constituent companies have high dividend payout and also high quality. You’ll have to sift through the portfolio allocation, compare and contrast with peers to make your decision.

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Thanks @StonePitbull Great thoughts mate. However my limited point was if the mutual fund is anyways going to invest in high quality dividend growing stocks (these would be typically well known large and mid cap stocks) then why not invest in these companies directly and not via a middleman. Buy and hold. I guess it comes down to personal preference and risk appetite. No one right answer :slight_smile:

If your question was for me, I was talking about ‘dividend yield funds’ category, not the dividend option while investing in MFs.

And as far as investing is concerned, one point that was made my managers is that, as dividends are taxed now, with TDS cut while giving dividends, and MFs need not pay taxes on dividends as them being institutions, and the NAV will grow accordingly.

Also, the funds invest in companies which are also growing, which essentially means more FCF, and run by managements who want to either sustain the dividend payout or even increase, after their capex plans, so dividends will increase and there will be price appreciation to for the stocks.

So I am guessing, there could be a potential merit with these funds, although there could be differences in the way different funds approach the theme, different parameters that they based their strategy on, which will be addressed in their SIDs.

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Interesting observations about Dividend Investing.

Investing in “Dividend Yield” funds will also have some other points:
(1) Though an investor will save Dividend Tax and that will help growth in NAV, if you need regular passive income, then you need to have SWP or profit booking and then pay the tax on Capital Gains. But still it will be less than nominal tax rate.
The drawback is that, the NAV may fall by 20%-30% routinely due to market volatility, and your passive income will get impacted.
If you are not investing for regular passive income, then it looks fine.
(2) For those investors looking for regular passive income, paying tax on Dividend Income should be all right. Anyway, you are paying income tax on your other regular incomes from FD, Salaries, and other sources of income which might be dependent on your tax bracket.

I think, it is more to do with the individual requirements of regular passive income and personal choices.

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Fair points. Even for someone investing for regular passive income, dividend investing has become a hassle forcing investors to submit form 15g/h to avoid additional taxation more than tax bracket. Going by MF route skips this step. For each his own.

One of the advantages of direct stocks dividend growth investing including reits (atleast they way I see it IMHO) is that it doesn’t really matter what’s happening in the market and to stock prices. Whether market is at a high or crashing, as long as the dividends keep coming in and keep growing and the underlying assets are solid companies. It just enables a long term orientation and reduces the need to keep tinkering with the portfolio based on market movements to capture capital gains. To each his or her own

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Agreed.

However the problem is finding such companies which increase the dividends over a period of time in Indian context.

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Many Indian companies have the record of paying good dividends for past many years. I remember reading something in the line of Indians like dividends, that may have been the case in the past, when they did not much about price appreciation, or it was a time when they expected a return on term insurance etc. Some people even asked the Dmart management for dividend. So, I am guessing at least for the foreseeable future, dividends at least from PSUs will continue, at least till government continues to hold majority stake. Many non-PSU companies exist as well like Hero.

If we are at least reasonably sure that sales and profits will remain to be the same, if not increase, and can follow the price, and demand, and if they are available relatively cheaper than they were in the past, despite them being in sunset sectors, I guess one can buy them, provided one does not bring the concept of opportunity cost into the context of dividend investing. And if it indeed happens again, like many senior investors say now, that after 10 years or so, such a dividend yielding PF becomes substantial, and as such, provides with some secondary income, that would be great, wishful thinking, but possible I guess.

I have allocated some to this concept, work in progress, still learning.

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Hello Everyone,

Nice to see someone started this thread. I have implemented this strategy and result so far is decent. 85% of Expenses are now covered with dividend which is growing each year.

However, I just want to tell upfront that this strategy only make sense to people who are looking to get out of rat race and allocate more time to activities they like and have some time( which is substantially less that their regular job) for tracking Dividend growth portfolio. This might not create huge wealth like growth stocks. But it can give you time(which is very valuable) upfront.

Ironically all this year, I convinced myself that I will not get much capital appreciation and just get cash flow from dividends. But recently most of the dividend stocks have turned into growth stocks. E.g. CDSL,Infosys,RITES,SJVN, Tata Investment corp , IRFC etc. Off course some of them might just correct after market euphoria resides.

People mostly look at dividend yield which is not fair if someone wants to build Dividend growth portfolio. Most important thing is the consistency in paying out dividend. Second is increase of dividend in every 1 or 2 years. And this goes without saying that it should be quality company on all fundamental parameters such as Free cash flow, ROE etc.

With above in mind, sometimes yields might not be attractive at the beginning. But consider this as sapling which will yield good fruits in future (Which it does in my experience).

There is no harm in looking at Dividend option of mutual funds if they are paying out regular dividend. I understand argument about NAV reduction and giving your moneyback. But in realty this doesn’t work like that. SEBI has mandated mutual funds to create corpus for their IDCW option. This means mutual funds need to do profit booking and park money in such corpus to pay out dividend. So in a way, they are doing that we would have done anyways which is book the profit and take our money at regular intervals.

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High Dividend companies are either ex-growth and if they are not then dividend yield will not remain where it is as it’s valuation will rise to lower the yield as they get discovered by the market. So high dividend is only a debt proxy with some compensation for extra equity risk.

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