The Hindu Business Line : UTI Dividend Yield: Hold

While a portfolio of dividend yield stocks may offer better downside protection over the long term, most such funds are not particularly more defensive than diversified funds in correction phases.

With an absolute return of 21 per cent over the past year, UTI Dividend Yield has outperformed its established peer Birla Dividend Yield Plus over the said period. Investors can retain their units in the fund.

A wait-and-watch strategy is recommended as the fund has just completed one year since launch.

UTI Dividend Yield has, however, lagged its benchmark BSE-100's return of 32 per cent in the above period.

This is no different from the performance of most dividend yield schemes, which have under-performed their respective benchmarks.

Investment strategy: The fund aims at investing at least 65 per cent of the assets in stocks with a dividend yield higher than that of the Nifty basket (dividend yield is a measure of dividend paid per share as a percentage of the current market price).

This is likely to restrict the fund's universe of stock selection, but it reserves some flexibility by investing the remaining 35 per cent in stocks other than the category mentioned above.

The fund's portfolio as of May 2006 sports an average dividend yield of 2.3 per cent, against the Nifty's dividend yield of 1.65 per cent. It has effectively used the flexibility to invest in stocks other than high dividend yielding ones.

While investing 65 per cent of the assets, as per the mandate, the fund has picked a good number of companies with a dividend yield more than twice that of the Nifty.

Thus, while maintaining an average yield higher than the Nifty, it has managed to build the remaining 35 per cent of the portfolio from a broader universe of stocks.

Performance: Over the past year, returns from UTI Dividend Yield were a notch higher than of peers such as Tata Dividend Yield and Principal Dividend Yield. With a return of 58 per cent from launch till the market peak of May 10, the fund lost about 25 per cent during the recent meltdown — almost in line with its peers.

While a portfolio of dividend yield stocks may offer better downside protection over the long term, most funds with such objective, including Birla Dividend Yield Plus, have not so far proved to be particularly more defensive than diversified funds in short correction phases.

With the recent sell-off in the market, investors who have substantial allocation in equity would do well to hold a small portion in such funds. As high dividend yield is an indication of a stock trading below its intrinsic value, a portfolio of such stocks may exhibit lower volatility over various market phases.

UTI Dividend Yield has a portfolio with a balance of large and mid-cap stocks. The fund holds 58 per cent of assets in stocks with a market capitalisation of over Rs 2,000 crore.

It started with a portfolio laden with oil stocks but soon pruned it to retain only high dividend payout stocks such as ONGC and Indian Oil Corporation.