Dividend yield funds shine

While it isn't easy for thematic equity funds to sustain their winning streak for years in a row, dividend yield funds have managed to pull it off with much flair. The average returns for the year of these funds have bettered both the diversified funds' category, as well as the main indices, Sensex and BSE 500. Sure enough, there is a significant divergence in performance within the category, but what is notable is that these funds, (as a category) have managed to hold on to their winning ways across one-, three-, and five-year time periods. This is in contrast to their performance during previous rallies in 2006 and late 2007, when, as a category, they didn't shine.

INVESTMENT STRATEGY

Much of the credit for the performance of these funds goes to the underlying investment theme.These funds typically invest in companies that provide high dividend yields. And since such companies give away dividends because they have the cash flow, it filters out those that are high on debt, or aren't generating enough operating cash.

With stocks from FMCG, healthcare, financials and energy known to give high dividends, the funds' portfolios are largely invested in companies from these sectors. This has also helped their performance, as defensive stocks have done well in the last 2-3 years.

SCORECARDS

All the 7 dividend yield funds managed to better BSE 500 and Sensex during the year. What's more, these funds have outperformed the indices during three- and five-year periods as well. Tata Dividend Yield was the best performer during one- and three-year periods, driven by concentrated sector exposure and select bets in mid and small-cap stocks.

But it was Birla Sun Life Dividend Yield Plus that topped the five-year performance chart. The worst performer in the lot was Escorts High Yield Equity Plan — it returned the least across different time periods. Lower asset base (approximately Rs 7 crore) besides significantly high exposure to small-cap stocks limited the fund's performance.

PERFORMANCE AND STRATEGY

Dividend yield, as a theme, had traditionally not met with much success in the Indian fund context — not many Indian companies are known to offer high dividends consistently. And besides, the drastic upsurge in equities in the bull markets of 2006 and 2007 had narrowed the ‘value' opportunities to a trickle. In 2006, average returns (10 per cent) of dividend yield funds had compared poorly to that of the Sensex (46 per cent).

In 2007, though they managed to outpace the 47 per cent put in by the Sensex, better performance by peer funds continued to weigh against them. This, however, changed with the increased volatility in the equity markets since 2008. As a category, these funds have been among the top performers in last couple of years.

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