Dividend yield funds a good bet in volatile times

Himadri Buchmoneycontrol.comDividend yield funds that invest in shares of high dividend yield companies have done as well or even better than many diversified equity schemes which seek to invest in growth stocks.

At present, there are five dividend yield funds that investors can choose from.

All five dividend yield plans have managed to secure a place among the 40 top performing equity schemes over a five-year time frame until Monday.

The allure of dividend yield stocks is not easy to ignore especially when the equity market is seeing a lot of volatility, fund managers said.

While such stocks offer cash payments periodically in the form of dividends, they also are less volatile compared with growth stocks. Hence, these stocks provide a cushion when the market is going through a volatile phase.

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Himadri Buch

Assistant Editor|Moneycontrol.com

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"It makes sense to invest in dividend yield stocks in the current market scenario,” a fund manager at one of the foreign bank sponsored fund houses said. “Value stocks, as they are called, are defensive in nature and are resilient to market conditions than growth stocks," the fund manager said.

Over two-year, three-year and five-year periods all the dividend yield funds have managed to deliver double-digit returns.

In the three-year time frame, all dividend yield funds delivered returns in the range of 17.3-23.4 percent, compared with category average returns of 14.5 percent.

The best performing fund was BNP Paribas Dividend Yield Fund with 23.4 percent on a three-year window. Dividend yield is the ratio of company's dividend to market price of the company. High dividend yield hints that the stock is currently under-priced.

High dividend yield shares are less volatile than high growth stocks. This cuts both ways. In a falling market, these stocks may not slide too much, but the gains in a rising market are likely to be respectable than spectacular.

August-end portfolios of dividend yield funds reflect portfolios tilted in favour of banking/finance stocks, technology, engineering, oil & gas, and manufacturing sector companies.

According to fund managers,  generally, companies in banking, oil and gas, metals, and select mid-cap capital goods offer scope for high dividend yield companies.