Despite the recent rally, the Indian equity market has tested the patience of many long-term investors in mutual funds. Those who entered the market in 2007 and invested in diversified equity funds have particularly suffered as the category returns have been flat over a five-year period.
However, those who invested in dividend yield funds have been a luckier lot as these funds have managed to beat their benchmark indices over the period under review.
Diversified equity funds, as a category, have given returns of just about 1% over a 5-year period compared with returns of about 7% for dividend yield funds. The benchmarks of these dividend yield funds, on the other hand, have given negative returns ranging from 0.01% to 0.65%. Even for a three-year period, dividend yield funds have given average returns of 9.3% compared with anywhere between 2.53% and 2.84% for their underlying benchmarks, and 4.8% for the diversified equity funds category. The top performers within the dividend yield category over the five-year period include Birla Sun Life Dividend Yield Plus (10.4%), ING Dividend Yield (9.6%) and BNP Paribas Dividend Yield (7.3%).
?One reason these funds have done well in the past five years is that they invest in companies that generate cash and which are seen as safe bets during volatile times. The cash-generation ability of these firms allows them to give high dividend payouts and underscores the fact that these are a good set of companies to own, especially in tough times,? said Bhupinder Sethi, head, equities, Tata Asset Management.
According to market observers, the investor trust in companies has gone down in the last five years because of a difficult macro-economic situation. ?Whenever there is a financial crisis, investors are forced to question the business models of companies. Their trust factor is affected,? said the equity head of a fund house, who did not want to be named. ?At these times, they are more inclined to invest in companies that are seen to have a stable and robust business model. High dividend paying companies generally enjoy better trust as they have a history of being profitable and sharing their wealth with investors.?
Sethi says high dividend yield stocks are sometimes perceived as boring stocks to own. ?But if one seeks out companies with higher dividend yield, which at the same time also have growth drivers, these would be one of the better set of stocks to own.”
FMCG, pharma and IT firms have been in the forefront of paying dividends in the past five years. Hexaware Technologies, Aditya Birla Nuvo and Hindustan Unilever have dividend payouts in excess of 100% over a five-year period.
