Why does a Dividend Yield Fund NAV rise even though the Price of Underlying Stocks do not?
1) Stock prices rise on 2 counts
2) One if the profits rise Year on Year
3) Two if demand rises due to Liquidity glut like we have been seeing during the Pandemic
4) Also one must remember that if stock prices don’t rise, it does not mean that the company is non performing
5) Take ITC for instance. It is a successful and profitable company whose price isn’t rising year on year because it’s profits though big are not rising and also demand isn’t rising
6) When a company’s profits are good but growth prospects are moderate because of the industry growth prospects not being high (like FMCG), the chances of rapid profit growth may be small
7) Such companies do not invest their profits in their business
8) In fact they are cash rich companies which are very healthy financially
9) They have tons of money and they too reward shareholders by providing hefty dividends
10) While FD today is providing returns of under 5%, companies like ITC are provided annual dividends of 5% to 6% while Coal India whose market price has been stagnant provides dividends of upto 8%
11) So if we have a Dividend Yield Fund, the fund receives cash through such Dividends
12) And the fund uses this additional money to buy more dividend yielding stocks
13) So if in the case of Growth Fund, the NAV of the Mutual Fund Scheme Grows on account of rising underlying Stock Prices
14) In the case of Dividend Yield Mutual Fund Scheme, the Growth is on account of purchase of additional stocks out of the dividends yielded (produced) by the underlying stocks within the scheme
15) The other way in which the Dividend Yield Fund NAV rises is due to
16) Demand for the underlying stocks that increases their prices which thereby increases the NAV of the Dividend Yield Mutual Fund Schemes And / or demand for the Dividend Yield Mutual Fund Schemes itself
17) So net net it is not always a rising stock price that rewards investors but also because of the high quality dividend yielding stocks that produce healthy dividends year after year although the stock prices may not rise much
