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Dividend Stocks vs Mutual funds Dividends. Advantages and Disadvantages of Investing in both

Difference between Dividend Stocks and Mutual funds Dividends

In this article, we are going to discuss the difference between Mutual Funds Dividend and Dividend Stocks. We will also explain the advantages and disadvantages of investing in dividend stocks and dividend mutual funds.

Table contents

Why to invest in dividends

Factors before investing in dividend funds

Stock Dividends

Advantages and Disadvantages of investing in dividend stocks

Mutual Funds Dividend

Advantages and Disadvantages of Investing in Mutual Fund dividend

Main Difference Points

Final Thought

Many investors are looking for new ideas for creating their wealth. Dividends provide a passive income stream. Many equity investors are investing in various stocks just for dividend income. Dividend income is the passive income which can be started with your main job.

Choosing between the dividend stock and dividend mutual funds is depending upon individual choice and needs. There are various factors for selecting the better option between mutual funds and stocks.

The income from the stock dividend or mutual funds dividend is the extra income over the original investment. The dividends are the profits generated by any company which is transferred to the shareholders via pay-out option.

Why to invest in dividends?

You can invest in dividends for generating passive income and this will be beneficial for those who are not willing for a lump-sum payment and selling of stock over a duration of time.

It will be beneficial for retired persons or those who are planning for retirement creating a steady income through dividend pay-out.

You can easily maximize your investment with the compounding. The magic of compounding is that it increases the wealth over time and returns can be reinvested dividend payment.

Factors before investing in dividend funds

  • Dividend Yield - you need to check the history of the stocks or funds you are willing to invest for dividend pay-out.
  • Past performance - you need to check the past performance of the dividend payout ratio and provide regular dividends. Duration of the fund's past years performing various market cycles bull and bear phases.
  • Dividend Risk - the dividend investing should be done on reliable funds and stocks considered the risk as the main factor. There is a higher risk in small and mid-cap stocks as compared to large-cap stocks.
  • Volatility- you need to check the volatility of the stocks in the short term. If the share price of any company is having higher volatility in the short term then you need not select that stock.
  • Objective Goal - there should be a fixed duration of time to be considered before investing in dividend income investment products.
  • Other factors in company selection are fundamentals, growth, sales, profit, financial statements and lower expense ratio in mutual funds

When is the dividend declared in mutual funds and stocks

The dividends are part of the profit of the company which provides to the shareholders or investors.

Some companies pay higher dividends depending upon the profit while some companies do not provide any dividend. No company needs to provide a dividend.

The mutual funds dividends are depending on the fund house management. There are also predetermined frequencies such as monthly, quarterly, half-yearly, and yearly pay-out of dividends in mutual funds schemes. You can buy the stocks and mutual funds using your online trading account

Stock Dividends

Many investors are preferring investing in stocks directly than in mutual funds. If there is profit in the company they will return a part to the shareholders as a dividend pay-out and the remaining is used for expansion and growth of the company. It is a part of the profits that are paid to the investor.

The dividend shows that the company is performing well, has better financial conditions and healthy expansion. The dividend stocks are less risky than non-dividend stocks as the past performance is not a guarantee for future performance.

You need to select the right stocks that declare dividends regularly and also grow over the duration of time. These are the main two factors before investing in dividend stocks. There are other factors such as the EPS, sales, profit, and dividend per share. There are many high dividend stocks in the market but selecting the right stock requires detailed knowledge and analysis.

The good stocks are having stable dividend income over the short term. As the time passes, the company grows and also increases the dividend payment. The share price may drop at the time whenever the dividend is declared. Good dividend stocks have a timely distribution of the dividends

There are certain PSU funds where the dividends declared are higher and more attractive options for steady income. The taxes are applied after earning Rs 10 lakhs per financial year.

Advantages of investing in dividend stocks

  • Secondary income - the dividend income generated from the stocks is your passive income. This is the main factor for investing in dividend stocks. Selecting the good dividend stock is to be taken proper care as it requires various analyses and research. You will be receiving a steady dividend income from the stocks regularly and not worrying about selling off stock if it has a high dividend yield.
  • Time duration against bad markets - The dividend income can be also beneficial in the case of bearish markets. As in this time the stock may sometimes fall at that time you will not get any return but if they are a good dividend-paying company you may receive the dividend income at such times.
  • Low risk - many large scale companies have a strong market presence and don't have any major volatility in the short term. Many good dividend stocks have high dividend yield and payout ratios. Large-cap stocks are less volatile as compared to other small and mid-cap stocks over the duration. If the company is paying the dividend regularly and the share price is not rising then it will be better for protecting the capital investment.  
  • Growing the wealth- if you have your dividend income reinvested in the same stock then you will be creating a higher capital investment over a duration of time. If the share price of the stock rises over the years it will also increase the value of the initial investment. The income received from the dividend stocks can be used to invest in Mutual funds, fixed deposits, gold, and other stocks. You have various options for creating wealth over the duration. It will be long term investment goals. You need to hold good dividend stocks for a longer duration for better benefits.

Disadvantages of investing in dividend stocks

  • Stock selection - it is difficult to select high yield dividend stocks. You can check the fundamentals and techniques of the company but for dividends, it’s upon the company. You need to have proper knowledge in selecting the stocks.
  • Double taxation- The important factor to be considered in dividend income is double taxation. The first tax is levied when the company pays tax and the second time tax is levied on the personal taxable income. The taxes are paid in terms of company shareholders and your tax. There is a DDT of 15 percent on the dividends which are paid by the company. The investor has to pay the capital tax of 10 percent on the dividend income on income above 10 lakhs in a financial year.
  • No certain duration - they are not mandatory for a company to declare the dividend. The management decides the profit is to be used for expansion purposes of declaring the dividend. At that point, you will be receiving a lower dividend or no dividend at all.
  • Dividend Policy change- another is the change in the dividend payout policy which is decided by the company. There will be a reduction in the dividend pay-out. If in certain markets conditions the company may not be able to provide dividends. You need to check the company dividend policy. The company has the right to declare and change the duration and value of the dividend stock.
  • Risk tolerance- If any company is declaring a high dividend then it may sound good in the short term, but in the long term it will not be always beneficial. If the company does not invest the profit in its growth and expansion it will be not able to sustain itself in the high competition market. It will not create any value in the long term. There are certain risks associated with high dividend pay-out risk factors.

Mutual Funds Dividend

Dividend income is dependent on the surplus available with the mutual fund schemes. In mutual funds, the fund manager sells the shareholding to generate dividends. In debt linked funds the yield remains the same but in equity, the dividend yield can change in time duration.

The money can be invested by the fund manager in both dividend companies and growth companies. The fund manager invests in various companies, collects dividends, and transfers the pay-out to the investor. In dividend mutual funds schemes the fund manager in AMC can select either the dividend-paying stock or no dividend-paying stock.

The mutual fund invests in equity and equity-related instruments. They are investing in some high paying dividend company stocks and high growth company stocks. The fund manager invests in stable companies and has good cash flows.

Dividend yields are the dividends paid per unit per the market price. The dividend yield fund is different from dividend options in Mutual funds.

There are two options for providing returns in Mutual funds

  • Growth option - Growth provides returns by increasing the value and mutual funds units. The value of funds increases as the profit is generated. It reinvested in funds and helped to grow the capital amount.  
  • Dividend option - received the profit from the mutual fund providing dividend. Dividend periodic dividend. The dividend of mutual funds is calculated based on NAV.

The NAV of the mutual fund is reduced whenever the dividends are declared for example if the mutual fund having a NAV of Rs 50 declared the dividend of Rs 5 per unit, it will reduce the NAV of the scheme to Rs 45 per unit.

If you are planning to invest in mutual funds then you can invest in SWP of any growth plan schemes and then start SWP monthly there is no DDT applied. The capital gains are more efficient. However, if you are a conservative investor and looking for fixed income from mutual funds then you can invest in SWP.  

Various options in mutual funds dividends

  • Dividend pay-out- in these plans you will receive the dividend in your bank account directly whenever the schemes declared the dividend.
  • Dividend reinvestment- In these plans, the dividend amount is reinvested in the scheme you have selected and your capital investment grows increasing the units.
  • Dividend sweep - In these plans, the dividend value is invested in other mutual funds of the same fund house.

Advantages of Investing in Mutual Fund dividend

  • Less volatility and Risks - the mutual funds are having low risk and less volatility as compared to stocks. You will receive dividends upon the surplus funds in the scheme.
  • Selection - You may require more skill and research in selecting the dividend stocks but for new investors, they can start with investing in mutual funds dividends. You may not focus on buying and selling of shares in mutual funds, everything is managed by the fund manager in AMC.
  • Taxation - Equity Funds 10 percent dividend distribution tax DDT at 10 percent mutual funds short-term gain tax at 15 percent holding for less than 1 year.
  • Dividends received on equity funds are tax-free. The mutual funds scheme is paying the DDT and after that, you may receive the payment.

Disadvantages of Investing in Mutual Fund dividend

There are fewer benefits in mutual funds dividends as compared to stock dividends.

Dividend pay-out- In mutual funds, the dividend is generated based on the profit, if there is profit then it will be declared otherwise no dividend will be declared.

If any mutual funds schemes declare the dividends then it is not an indication of profitability nor a wealth creation.

It has a low dividend yield as compared to the stocks.

Main Difference Points between Dividend stock and Mutual fund dividends 

If the dividend is declared by the stock company it is considered as a positive and healthy signal to the market but in case of mutual funds, it does not give any positive signal and growth of the mutual funds.

Stock dividend shows the profit earned in the company but mutual funds dividends do not represent the profit of the fund schemes. If any mutual fund scheme is providing high dividends it does not show that the scheme is generating more profit and performing well.

Final thought

You need to understand and research before investing in any mutual funds or stocks due to the fact they are providing high dividends. You need to check the performance both in the bull market and during recession time regarding the investment.

Investing in dividends requires a considerable amount of research and knowledge. There are various risks to be considered before investing in any dividend investment. As you can check the pros and cons of dividends is upon your objective to make any investment. As both are associated with market risk.

Disclaimer: We do not offer any financial advice or suggestion here. The information provided here is for informational and educational purposes only. Don’t use this information as final, consult a financial advisor or planner before making any decision regarding the investment.


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