Here's what makes dividend yield funds rewarding for investors

DP Singh, Deputy Managing Director and Chief Business Officer at SBI Mutual Fund and Rohit Shimpi, Fund Manager, at SBI Funds Management discussed the nitty-gritties of dividend yield funds in the latest episode of 'Mutual Fund Corner'. The portfolio of such a fund is one that comprises stocks that have a consistent track record of paying dividends to their shareholders.

Singh mentioned that off late the corporate sector in India is giving good dividends and this can be quite rewarding for investors going forward.

"These funds offer decent and safe returns to the investor at times of downturns of markets," he told CNBC-TV18.

Singh believes this category is going to be very big in India.

"I foresee that it will be not less than Rs 100,000 crore in very very short period. The companies are currently having very good dividend paying strategies due to upcoming businesses. We can see that even small-cap companies are providing a yield of 4 to 5 percent," Singh added.

On which companies pay dividends, Shimpi said that the one which are more matured in their lifecycle generally give dividends.

"They are able to pay a steady dividend, because that essentially is the cash flows that they generate from their business. Even after their capital expenditure requirements, they can go ahead and use them to pay out regular dividends so it is not that these companies really don't have growth. We are seeing them across sectors and across market cap categories too," he told CNBC-TV18.

Dividend yield funds are thematic mutual funds where a minimum of 65 percent of the AUM is invested in high dividend-yielding stocks. These funds primarily invest in equity shares of companies that declare dividends regularly.

Any firm will pay dividend to shareholders only when they are able to make a profit. This means that the underlying stocks of these funds are of companies that have strong financials.