Dividend yield funds flounder

Dividend yield funds as a group have underperformed the bellwether index Sensex over the past one- and three-year time periods. Nevertheless, this category of funds has given better returns than the Sensex and S&P CNX 500 over the past five years.

This is mainly due to a strong performance during 2009 and 2010. In general, dividend yield of the larger indices has been about 1.5 per cent, but some segments offer much higher yields, more so in the case of mid-cap stocks.

There are seven funds in the dividend yield funds category. In the last one year, all the funds in this category have underperformed the indices, such as the Sensex and BSE 100. Over the last three years, only BNP Paribas Dividend Yield, ING Dividend Yield and Tata Dividend Yield have managed to outperform. Most of these funds are mid-cap oriented, which makes them more vulnerable in volatile and correcting markets.

After a dream run during 2009-12, these funds saw heavy erosion in NAV following the massive fall in prices of many mid-cap stocks.

The strong performance of these funds during 2009 and 2010 has seen the average five-year annualised returns touch 19 per cent compared with the Sensex gains of 18 per cent.

ING Dividend Yield and Tata Dividend Yield outpaced other funds by delivering robust gains of around 23 per cent over the past five years. Escorts High Yield Equity Plan and Principal Dividend Yield have been the laggards in the category.

Sector choices From the consumer non-durables sector, Tata Dividend Yield changed its top allocation to software in early 2012.

Currently, software accounts for 21.5 per cent of its portfolio and helped the fund notch up significant gains.

The S&P BSE IT index has delivered extraordinary gains of 50 per cent in the past one year.

Birla Sun Life Dividend Yield Plus has major exposure to the banking sector, with allocation of 19 per cent, software and consumer non-durables take the second and third position with 14 per cent and 12.7 per cent, correspondingly. Given that banking stocks were knocked down and consumer stocks did not do much over the past one year, the scheme’s performance has been quite lacklustre.

Principal Dividend Yield, which has significant exposure to the banking sector with a share of 18.5 per cent, has underperformed over the past one year.

The traditional dividend yield stocks, such as oil marketing companies, too have not fared well over the past few years.

Mid-caps stocks, as a category, corrected by over 40-50 per cent, before staging a significant recovery in late 2013.

But that was still not enough to shore up the fortunes of most dividend yield funds that have high exposure to such stocks.

Why did they do badly?

■ Mid-caps underperform

■ Oil marketing companies lack lustre

■ High holdings in banks hurt

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