With the stock market trading at inexpensive levels, this is a good time to buy equities with a five-year perspective. But how do you cherry-pick quality stocks that trade at attractive prices?
Buying the Birla Sun Life Dividend Yield Plus fund would be a good way of doing this. As one of the earliest to adopt a pure dividend yield strategy, this fund has built up a formidable track record, merely by adhering to the discipline of selecting stocks for their high dividend yield. It focuses on stocks trading at twice the dividend yield of the Nifty.
Here are three compelling reasons to invest in this fund:
* The Birla Dividend Yield Plus has managed a 25 per cent compounded annual return in the nine years from launch. Returns over 5- and 3-year terms too stand at 12 and 19 per cent respectively. These are ahead of category averages for equity funds. These returns have come as much from gains during bull markets as from containing losses extremely well during market meltdowns.
A dividend yield based strategy has outperformed over the past decade because it automatically focuses on out-of-favour stocks under all market conditions. In bull markets, going for high dividend yield helps avoid overheated stocks and sectors. In bear markets, the dividend yield fixes a floor for the stock price, reducing the risk of losses.
In keeping with this, the Birla Dividend Yield Plus has navigated falling markets much better than its peers. Both in 2011 and 2008, the fund registered lower losses than three-fourths of the equity funds. It also stayed ahead of its benchmark during bull phases. This makes the fund a good option for conservative investors.
* Though Indian companies have traditionally been low-dividend payers, that looks set to change. With a slowdown underway and new investment plans on hold, top companies are sitting on cash piles. Increased investor activism on such idle balances should lead to companies raising dividend payouts or exploring other modes of returning cash. This should boost returns for any fund that invests in dividend yield stocks.
* High interest rates and the ongoing slowdown make this a challenging time for highly leveraged companies or those in nascent stages of their business. A focus on companies with high dividend yield automatically ensures a portfolio of mature businesses with good earnings quality and fewer governance issues. By end June 2012, top stocks in the fund’s portfolio were ITC, ONGC, Tata Motors DVR, Bajaj Auto and Hero Motocorp. The key sector exposures were to financials (18 per cent), energy (16 per cent), FMCG (12 per cent) and autos (14 per cent), making for well-balanced spread between defensive sectors and cyclical ones. The NAV for the growth option unit is Rs 83.8.