Dividend yield: a good long-term strategy option

To the casual eye, there’s nothing worth writing home in the returns generated by the various categories of equity mutual funds recently. However, on a closer look, a most interesting type of fund draws attention to itself. Dhirendra Kumar writes.

To the casual eye, there’s nothing worth writing home in the returns generated by the various categories of equity mutual funds recently. However, on a closer look, a most interesting type of fund draws attention to itself. Almost since the financial crisis of 2008, some of the funds that emphasise companies’ dividend yield have consistently out-performed the markets. Even though they are not strictly comparable, UTI Dividend Yield, ING Dividend Yield and BSL Dividend Yield Plus have been impressive in their resilience in the face of falling markets.

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Now, there’s another interesting new option for investors who are interested in high dividend yield stocks. This is the IIFL Dividend Opportunities Index Fund from India Infoline Mutual Fund. Before we go further, I must point out that the idea behind looking at such funds is not to seek dividend by itself but to use a high dividend payout as a marker for a certain quality in a company. Companies whose dividend payout are a high proportion of their stock price tend to have a good cash flow whose future visibility the management is confident about.

The IIFL Dividend Opportunities Index Fund is based on an NSE index called the CNX Dividend Opportunities Index. This index consists of 50 high dividend yield large and midcap stocks. The index is construction of the 50 highest yielding stocks out of the universe of companies larger than a certain limit. Since the troubles began in 2008, this index has done better than the Nifty in both falling and rising markets.

However, dividend yield is generally considered to be a relatively better strategy in bad times rather than good ones. The word relative is important here. If there’s a decisive upturn in equities, then high-dividend yield funds may not do as well as others, but the basic quality of their portfolios will always shine through in the long run.