Top marks for consistency ::Business Line

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With volatile markets, investors can consider adding dividend yield funds for a bit of stability. These funds focus on stocks with high dividend yields (dividends as a proportion of market price) and stable profits. UTI Dividend Yield Fund is a good option in this space.

The fund has a mandate to invest at least 65 per cent per cent of its portfolio in stocks with high dividend yields.

While dividend yield is usually associated with mid-cap stocks which can also be volatile, this fund has a high proportion of large-cap stocks (those with a market capitalisation of over Rs 7,500 crore) in its portfolio.

The average market cap of its February portfolio was about Rs 85,000 crore.

UTI Dividend Yield Fund is suitable for conservative investors who want to shield their portfolios from swings in the market. It has also paid out consistent dividends, even during the market downswings of 2008 and 2011. However, dividend yield funds have to be held for longer periods than other funds for them to work well.

PERFORMANCE

The fund has delivered an annual return of 5 and 10 per cent over a three- and five-year period. That’s a thorough trouncing of its benchmark BSE 100’s return of 1 and 3 per cent in the same periods.

The fund has fared better than peers in containing losses during periods of downturns. During the 2008 bear market, it lost 49 per cent against the 64 per cent loss logged by the BSE 100.

Similarly, the 2011 downturn saw the fund restricting losses to 21 per cent compared with the benchmark’s 29 per cent. On a five-year rolling return basis, the fund has outpaced its benchmark nine out of ten times.

But returns in the past one year are below the benchmark, owing to stocks such as NTPC, Bajaj Auto and Hero Motocop, which have good dividend yields and payouts, but which have markedly underperformed. This is in line with the broader market trend of value stocks not faring well.

PORTFOLIO

The fund’s February portfolio has about 82 per cent invested in large-cap stocks. Almost 80 per cent of its portfolio has stocks with dividend yields above the BSE 100 or the Nifty.

The fund has also, in the past, taken high cash and debt calls which helped in containing downsides. For instance, at the depths of the 2008 bear run, the fund had just 67 per cent invested in equities.

Such low exposure could, however, mitigate ability to give superlative returns when markets bounce up.

In the 2011 downturn, the fund did not take such high cash calls, keeping equity exposure at around 90 per cent. Yet it has done well at containing losses.

With the fund following a buy and hold strategy, portfolio churn is minimal in terms of both stocks and sectors. The top sector holding has remained in bank and software stocks. The fund loaded on cement stocks over 2011, and the sector had a good rally in 2012.

Stocks in its portfolio with higher dividend yield include ONGC, Tata Chemicals, NTPC and Oil India.