The Hindu Business Line : ‘High dividend yield is as important as capital appreciation’

UTI Dividend Yield Fund has been among the better performing equity funds piggybacking on this theme over the past year. Ms Swati Kulkarni, the fund manager for this fund, explains why it is necessary even for dividend yield investors to consider the prospects for capital appreciation while selecting stocks.

Excerpts from the interaction:

How do you explain the wide divergence between the various equity funds using dividend yield as their theme? Over a three-year period, the best dividend yield fund has managed a 68 per cent absolute return while the worst one has only delivered 23 per cent!

Dividend yield funds use high dividend yield as a criteria for stock selection. The process provides the flexibility to invest in dividend yielding stocks across the sectors. Hence, depending on the stock selection, market timing and sector allocation the returns may vary.

What in your view has helped UTI Dividend Yield Fund’s out-performance? Is it sector or stock selection?

Out-performance has been due to a combination of both sector and stock selection. For example, we were overweight in banks and utilities in 2007; in past six months we turned underweight on both the sectors.

Earlier, we stayed away from FMCG, auto and oil marketing companies despite good dividend yield as valuations were not attractive considering the expected earnings growth. High dividend yield is an initial filter; we focus on the potential for capital appreciation.

Analysis of future earnings prospects, competitive strengths, regulatory controls, management quality, and sustainability of cash flow vis-À-vis the valuations helps in identifying such potential.

Though selection of stocks based on dividend yield is usually viewed as a defensive strategy, stocks offering high yield haven’t contained downside well during the recent market correction. HCL Infosystems, some of the PSU banks and oil companies are examples. To what do you attribute this?

Being an equity investment, when the sentiment is adverse the stocks fall in value. But we have observed in past that such stocks have outperformed the broader market over longer periods, as investors do eventually seek undervalued, defensive bets.

Why has the UTI Dividend Yield Fund consistently held a high cash position in its portfolio (13-25 per cent in recent months)? Surely, the sharp decline in market valuations has thrown up many more dividend yield opportunities.

The fund has held higher cash position as we believed that in the short run, macro variables such as rising crude prices, inflationary pressures and slowing economic growth may adversely affect the investor sentiment. We are in the process of deploying cash as our long-term bullish view on the fundamental strength of Indian equity remains intact.

Debt investments today offer yields in the range of 10-11 per cent. Is there then any rationale to seeking dividend yield stocks, given that even fundamentally sound dividend yield stocks offer yields of only 7-8 per cent there is also the risk to your capital?

Dividend received is just the income that the fund earns from investment in the stocks. Our endeavour is to look for the capital appreciation for the investors in the fund. Hence, you would observe that over a 2, 3 year period the returns are superior to debt investments.

AARATI KRISHNAN

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