Selecting stocks on the basis of high dividend yield has not proved to be winning strategy in the recent stock market rally. If you rank diversified equity funds by their one-year returns, most dividend yield funds are bunched up in the middle of the charts.

Birla Dividend Yield Plus Fund, the fund with the best five-year record in this category, has turned in a muted performance in this genre. Its one-year return of 30 per cent lags the 43 per cent gain in Principal Dividend Yield Fund and the 36 per cent gain by BNP Paribas Dividend Yield Fund.

Yet, investors should consider buying Birla Dividend Yield Plus for their core portfolio.

The recommendation is backed by two reasons. One, buying a dividend yield fund is a good way to shield your portfolio from any correction in stock prices. Gains of about 30 per cent in the broad market in 2012 have come mainly from expanding price-earnings multiples for markets. If expected profit growth does not materialise or takes longer than expected, stock prices could correct. In this case, dividend yield stocks would suffer lower declines than others.

Birla Dividend Yield Plus has proved quite good at containing downside in the past. A rolling return analysis shows that the worst annualised return an investor in the fund has earned over any five-year period, has been seven per cent a year. Two, the fund’s portfolio is dominated by stocks trading at a discount to the market, making for good upside potential. The fund’s November portfolio traded at an average price-earning multiple of 15 times, a discount to the market’s 19 times. Roughly half the stocks in the portfolio were inexpensive, at a single-digit multiple. This proportion is much higher for Birla Dividend Yield Plus than for the competing dividend yield funds.

The Birla Dividend Yield Plus remains the best performing dividend yield fund over the last five years with annual returns of over eight per cent. Three-year returns are at 11 per cent a year. The returns convincingly beat the Nifty returns of less than one per cent and six per cent, respectively.

Birla Dividend Yield’s disciplined focus on buying high-yield stocks has meant that its portfolio is currently overweight on relatively unpopular, but inexpensive sectors. For instance, in the latest portfolio, public sector bank stocks had a 16 per cent weight and large software companies at about seven per cent. Within autos, commercial vehicle makers had a larger weight than two-wheelers. In the last six months, weights to public sector banks, software majors have been raised while those to refineries and FMCGs have been trimmed.

(This article was published on January 12, 2013)
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