February and March are usually the months when companies and mutual funds declare dividends. It’s a usual annual practice as March is usually the financial year end and funds are generous in giving out dividends. But this year has been different. Equity funds have declared dividends with yields as high as 20-25%.
Dividend yield is dividend per unit in rupees divided by the net asset value (NAV). Typically, dividend yields are in the range of 5-10%. Mutual fund experts say that dividend yield of greater than 15% indicates that the scheme has paid high dividends. Close to seven equity-oriented funds had declared a dividend yield of more than 15%, till 21 March, according to data by Value Research. DSP Blackrock Equity Fund’s (DBEF) dividend yield was the highest at 25.54%, with a dividend of Rs16 per unit. In 2017 (for the full year) its dividend yield was 11.66%; 12.32% in 2016 and 14.96% in 2015, according to Accord Fintech, a mutual funds database. Recently, Kotak Classic Equity scheme declared a dividend of Rs4.778 per unit, translating into a dividend yield of 20%. Between 2015 and 2017, its dividend yield was between 2% and 3%. As per Value Research, there are 45 equity oriented funds whose dividends yields are 10% or more.
But why is it raining dividends these days?
It’s the dividend tax
Budget 2018 imposed a 11.648% Dividend Distribution Tax (DDT; including surcharge and cess). Up until now, dividends from equity-oriented funds were tax-free and were also exempt from paying the DDT. Since the DDT was going to come into effect 1 April 2018, many fund houses were expected to dole out large dividends before 31 March to avoid paying tax on it. That is the main reason why many equity oriented funds have declared large dividends.
Word on the street is that some fund houses have paid dividends now, to keep it tax-free, instead of paying these in the first two quarters of the next financial year.
What you should do
Mutual fund dividends come out of your own investments. After the record date—all existing investors who are invested in the scheme as on this date are eligible to get the dividend—the NAV of a fund falls in proportion to the dividend declared. So, you don’t make extra money by investing in a dividend plan.
Earlier, many investors used to invest in dividend plans of equity funds without thinking much as they were tax-free. But be careful the next time you invest in a dividend plan. There is nothing wrong in investing in a dividend plan if you wish to receive dividends but each such dividend would now attract DDT.
If you don’t need dividends, opt for the growth plans as the long-term capital gains tax (10.4%, including cess and indexation) will be imposed only when you sell the units.