Mutual Funds

UTI Dividend Yield Fund: A cushion for volatile times

Parvatha Vardhini C | Updated on August 02, 2020 Published on August 02, 2020

The fund’s returns have been on par with, or better than, its benchmark over 1, 3 & 5 years

The stock markets have been on a roller coaster ride this year with the bellwether indices first falling by 35-40 per cent until end-March and gaining over 40 per cent since then until now.

With earnings visibility lacking, the direction of the market remains unclear.

Investors looking for a cushion in volatile market conditions can consider dividend yield funds as they tend to contain losses well. A plunge in returns of fixed-income options, too, favour dividend yield stocks at this juncture. Following a high dividend yield strategy also means focussing on beaten-down stocks, which may be good value picks for the long term.

UTI Dividend Yield is a good fund in this category.

Strategy and performance

While the scheme predominantly invests in dividend-yielding equities, it also picks its stocks based on other parameters such as free cash flow generation, management quality, earnings prospects, as well as industry scenario.

This strategy also helps the fund eventually benefit from capital appreciation in the stocks in its portfolio.

As per its mandate, the scheme can invest across market-caps, giving its portfolio a multi-cap flavour.

The fund though tends to lean towards large-cap stocks, with 70 per cent of its portfolio in large-caps now. It invests 95-99 per cent in equities across market cycles and does not take cash calls.

The fund is benchmarked to the Nifty Dividend Opportunites 50 Index and has clocked returns almost on par with, or better than, the benchmark over one-, three- and five-year periods.

It has also outperformed the category average returns of multi-cap funds over these time periods by 1-4 percentage points.

It must be noted that while dividend-yield funds tend to do well in falling or volatile markets, they may underperform in secular bull runs.

Hence, the category is suitable for conservative investors.

 

Portfolio

UTI Dividend Yield invests predominantly in sectors such as information technology, consumer non-durables and certain PSUs, all of which have stocks with a consistent dividend yield record. Sectors such as IT and FMCG (fast-moving consumer goods) are also expected to fare better than most others this year amid the pandemic-induced slowdown.

With many banks facing pressures from bad loans and inability to pay dividends, the fund has reduced its exposure to the segment since mid-2017.

About five years ago, bank holdings stood at 20 per cent of the portfolio, as against 5 per cent now.

Banks and insurance companies have been asked not to declare dividends for FY20 to conserve capital; they may continue to retain earnings this fiscal, too. Consistent dividend payers such as Infosys, Hindustan Unilever, ITC and TCS are the top holdings for the scheme.

In FY20, for instance, these companies were among the top 15 dividend payers.

The fund also holds PSUs with good dividend yields, such as Coal India, Power Grid, GAIL, Mahanagar Gas, NTPC, NALCO, as well as in State-owned refineries.

While it tends to take exposure of 5-9 per cent in its top five holdings, the fund otherwise has a diversified portfolio of 40-50 stocks.

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Published on August 02, 2020
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