When the markets turn volatile, many of us try seeking safer havens. Some of us will leave volatile zones and some of us try finding out the safer or less volatile pockets in these volatile zones. Dividend yield is one such concept that has rewarded investors in developed markets.
Before we get down to this concept, we should first understand the importance of dividend. Dividend is nothing but the cash distributable profit the company hands over to the shareholders from time to time. Here, one should understand that the dividends being cash and distributed to the shareholders are hence seen as a reality.
The dividend yield on a company stock is the company’s annual dividend payments divided by its market cap, or the dividend per share divided by the price per share. It is often expressed as a percentage. An investor would prefer high dividend yield as it offers greater price support on the grounds that the stock is under-priced and vice versa.
The ‘Dogs of the Dow’ concept has worked well in US equity markets for more than a decade. It works on the basic premise that at the beginning of the year, you buy equal dollar amounts of the 10 Dow Jones Industrials stocks with the highest dividend yields. Hold these companies exactly one year. At the end of the year, adjust the portfolio to have just the current ‘Dogs of the Dow’. Here you are buying good companies when they’re temporarily out of favour and their stock prices are low. You may be selling them after they’ve rebounded. And then you proceed to the next batch of Dow laggards.
In India we do not have something like this readily available in a ready-reckoner form, but we do have some dividend yield schemes floated in the mutual fund industry. These schemes may not be strictly investing into the Dogs of Nifty, but they are more focussed on the high dividend yield stocks that are expected to offer good returns in times to come.
The oldest among them is the Birla Dividend Yield Plus, which started in February 2003. Most others came into existence afterwards with ING Vysya Dividend Yield fund being the last in the row as it was launched in October 2005. UTI makes it to the top slot in this category on the basis of the assets under management.
Over the last one year, the schemes in this segment have offered a mixed bag to investors. The performance has a wide range as captured in the table attached. The schemes from Tata and UTI have done more or less in the line with the broad market, and left investors with good rewards for remaining invested in these schemes. Going forward investors have to exercise their discretion while investing in the dividend yield mutual fund schemes. Putting money after an investment theme may not work, but one has to look at the performance and more importantly track the fund on a quarterly basis. Though this does not necessitate quarterly entry and exit from these types of funds, tracking is a must.
As an investor you should appreciate that these schemes typically offer you a good risk adjusted returns. The scheme’s risk profile is low compared to diversified growth oriented funds or sector funds. Hence you can consider one such scheme for your mutual fund portfolio.