Tata Dividend Yield: Buy

Investors who want less volatility to returns could consider funds that invest in the dividend yield theme.

For one, stable dividend payouts offer stability. Second, chasing high dividend yield stocks involves going against the market momentum and hence these are better value buys.

Of the handful of dividend yield funds, Tata Dividend Yield ranks in the top quartile over the three and five-year periods, lagging only BNP Paribas Dividend Yield. Tata Dividend Yield invests at least 70 per cent of its portfolio in stocks with a dividend yield above that of the Sensex, currently at 1.15 per cent. The fund has a strong record of consistency, beating its benchmark CNX 500 index 80 per cent of the time on an annual rolling return basis over the past six years.

Conservative investors looking for stability in returns can invest in this fund, with at least a five-year horizon.

Compared with its peers in the one-year period, Tata Dividend Yield’s 54 per cent return places it at the bottom of the pile. The fund invested in fewer multi-bagger stocks when compared with chart topper Birla Sun Life Dividend Yield and was a late mover away from underperforming software stocks.

But it ranks far above in longer market cycles. In the largely indecisive markets of 2013, for instance, while the category was down 14 per cent on an average, the Tata fund lost 11 per cent while Birla Sun Life Dividend Yield lost 18 per cent. The fund was also the best performer in the 2009-10 bull market.

While Tata Dividend Yield can switch between market capitalisations, it tends to play it safe.

The fund spent most of 2013 holding less than 25 per cent of its portfolio in small and mid-cap stocks.

It also had lower mid-cap holdings in 2012, which weighed on performance that year as mid-caps surged then. The past one year has seen large-cap stocks account for around 60 to 65 per cent of the portfolio.

Among sectors, the fund added heavily to banking from January last year which, together with non-banking finance stocks, accounts for the lion’s share of the portfolio.

Holding in private banks such as Karur Vysya, Axis, HDFC, ICICI and Federal Bank is much higher, with the private banking sector showing better prospects than public sector banks.

Auto stocks have consistently featured in the portfolio for the past two years, with stocks such as Hero Motocorp sporting good dividend payouts.

The fund has also very selectively moved into engineering and capital goods stocks, given that they lack consistent dividend payouts. Tata Dividend Yield has also held on to some defensive bets such as Colgate Palmolive, Lupin, HCL Technologies and ITC for years.