Dividend yield funds have had a fall from grace in the markets in the last five years with many funds in the category managing only an 8 to 9 per cent return, while the best diversified funds have delivered a 15-20 per cent return. But BNP Paribas Dividend Yield Fund has been an out-performer. How does Shreyas Devalkar, Senior Fund Manager at BNP Paribas Mutual Fund, steer this fund?

Your fund has outperformed most other dividend yield funds in the market. How does your strategy differ from the others?

You need to look for not just dividend yield but also opportunities for capital appreciation while selecting stocks. This is exactly what we have done in our portfolio. We don’t focus on buying the highest dividend yield stocks in the market. Instead, we select the ones which pay out good dividends and also have the potential to grow. For example, between a company that offers a 10 per cent dividend yield and is not growing, and one that offers a 4 per cent dividend yield and is growing at, say, 20 per cent, we would usually choose the latter. This ensures that capital appreciation also contributes to the returns, apart from the dividend.

When you say ‘growth’, are you referring to earnings growth?

We look for business growth. We follow what is called the BMV framework for stock selection, with the acronym standing for Business, Management and Valuation. We give the highest importance to the first factor — business. So, we look at the past growth in earnings, the moat for the business and the key catalysts. We consciously look for industries that are growing faster than the economy and within that, companies that are capable of growing faster than their industry. We try to look for companies with high return on equity and try to understand what is changing for the business and industry. Only if we find reasonable growth do we go on to the management or valuation. So, for the Dividend Yield fund, too, we filter stocks through this BMV framework to get at growth stocks first. We then narrow down on stocks with better dividend yield within this set. We don’t work backwards, in looking for dividend yield stocks and then searching for growth.

Do you look at the payout ratios to select stocks?

In my view, dividend yield is a function of two factors. One, the cash-throwing potential of the business and two, how much of that cash the management is willing to return to shareholders. It is useful to look at the cash flow yields of companies rather than merely dividend yield.

Recently, in the case of PSUs, there are proposals for higher buybacks of shares apart from high dividend payouts. In such cases, looking at the free cash flow yield or operating cash flow yield may help you identify opportunities even before dividend payouts actually start to go up.

In fast-growing industries, do managements really pay out high dividends? They may prefer to retain earnings and re-invest it, right?

Today, we are finding a fair number of growth companies paying higher dividends because the economy in growing slowly and there is generally low appetite on the part of firms, to invest in capex.

We have found a number of companies in the mid-tier space, for instance, from sectors such as textiles and chemicals, where the business is generating good free cash flows but the management has limited plans to invest. To find these, we need to look not just at the well-known names but also at a wider universe of businesses where there is likely improvement in free cash flows.

During the downturn, for instance, many textile firms had low payout ratios but as their cash flows improved, their dividends improved too.

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