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Dividend yield funds invest in stocks which have a consistent record of dividend distribution and have a higher dividend yield at the time of investing. It is believed that companies which distribute higher dividend are slow growth companies and hence they usually trade at a discount to their fair value. After all everyone wants to chase 'growth', and stocks with high dividend yield are often overlooked in the broader market. But if you are a long-term investor and look at investing in the equity markets traditionally (by eyeing a share in the profits of the company), dividend yield stocks, or even dividend yield mutual funds is a good investment avenue for you. At least the track record of funds investing in high dividend yield stocks says so.
Here let's talk about ING Dividend Yield Fund (IDYF). It is an open-ended diversified equity fund from the stable of ING Mutual Fund. Launched in October 2005, the fund has been in existence for over 6 years now.
Investment Objective and Proposition
The fund's primary investment objective is "to provide medium to long term capital appreciation and / or dividend distribution by investing predominantly in equity and equity related instruments, which offer high dividend yield". And as a mandate, IDYF invests 65%-100% of its total assets in equity and equity-related instruments of high dividend yield companies, upto 35% in other equity and equity related instruments and rest (i.e. upto 25%) in debt instruments and cash.
Portfolio Characteristics
In the last one year, the fund's investment in large-cap stocks has been in the range of 53%-77%, while that in mid-cap and small-caps has been in the range of 19%-40%. IDYF has refrained from taking any aggressive cash calls as revealed by its cash and cash equivalent holdings which is in the range of 4%-11%.
By following a defensive investment strategy by investing in high dividend yield stocks, IDYF adopts a value style of investing. Moreover, while undertaking its stock picking activity the fund pays attention to the following factors:
- Business fundamentals
- Management competence
- Growth prospects
Past performance is also considered, but essentially focuses on long-term fundamental driven values.
Equity Portfolio
| Holdings | Oct 2011 | Nov 2011 | Dec 2011 | Jan 2012 | Feb 2012 |
| Infosys Ltd. | 5.7 | 6.0 | 5.9 | 5.6 | 6.1 |
| ICICI Bank Ltd. | 2.3 | 2.3 | 2.3 | 5.1 | 5.5 |
| State Bank Of India | 2.3 | 2.2 | 2.1 | 2.5 | 5.3 |
| HDFC Ltd. | 5.4 | 5.2 | 5.4 | 5.5 | 5.0 |
| ITC Ltd. | 7.4 | 7.4 | 8.0 | 5.2 | 4.8 |
| Tata Motors Ltd. | 3.1 | 2.9 | 2.8 | 3.7 | 4.3 |
| Tata Consultancy Services Ltd. | 2.7 | 3.0 | 2.6 | 3.5 | 3.4 |
| Tata Steel Ltd. | 2.2 | 1.8 | 1.6 | 2.5 | 3.1 |
| Bosch Ltd | 2.1 | 2.6 | 3.0 | 3.1 | 3.1 |
| Bank Of Baroda | 2.3 | 2.2 | 2.2 | 2.3 | 2.9 |
As per the portfolio disclosed on February 29, 2012, the fund holds in all 43 stocks. Top-10 stocks constitute 43.6% of the portfolio, while its exposure to top-5 sectors has been 46.4% of its total portfolio. As on February 29, 2012, the large caps accounted for 77.0% of the portfolio and midcaps formed 19.3% while it held 3.7% in cash and equivalent assets. The fund manager of IDYF has not indulged in momentum playing, but instead preferred to stay invested as evident by its petite portfolio turnover ratio of 0.73 times. Dividend yield of the fund as on February 29, 2012 was 2.29%.
How IDYF has fared vis-à-vis its peers?
| Scheme Name | 6-Mth (%) | 1-Yr (%) | 3-Yr (%) | 5-Yr (%) | Std. Dev. (%) | Sharpe Ratio |
| ING Dividend Yield (G) | 2.0 | 4.6 | 38.7 | 15.9 | 7.03 | 0.34 |
| Tata Equity P/E (G) | 7.3 | 5.5 | 33.5 | 14.6 | 7.39 | 0.30 |
| UTI Dividend Yield (G) | 2.8 | 4.3 | 30.7 | 16.0 | 5.89 | 0.32 |
| Principal Dividend Yield (G) | 5.6 | 4.6 | 30.5 | 9.9 | 6.96 | 0.27 |
| SBI Magnum Contra (D) | 0.3 | -1.9 | 22.1 | 7.6 | 7.89 | 0.19 |
| BSE-200 | 3.3 | -0.9 | 27.5 | 7.3 | 8.14 | 0.22 |
The table above reveals that IDYF's performance has been quite luring. The fund has outperformed the benchmark index, BSE 200, across time frames, and has clocked returns of stunning 38.7% & 15.9% CAGR over the 3-Yr and 5-Yr respectively, as against the 27.5% CAGR and 7.3% returns generated by its benchmark BSE 200 over the similar time frame.
When assessed on the volatility front, IDYF has exposed its investor to a low risk (as revealed by its Standard Deviation of 7.03%), and has been successful in clocking attractive risk-adjusted returns (as revealed by its Sharpe Ratio of 0.34) as well. In fact with the Sharp ratio of IDYF being higher than the one clocked by its benchmark, we can say that the fund has handsomely rewarded its investors by managing its risk well. This thus makes the fund a low risk- high return investment proposition.
Year-on –Year Performance
| Scheme Name | 30/Mar/07 | 31/Mar/08 | 31/Mar/09 | 31/Mar/10 | 31/Mar/11 |
| 2007-08 | 2008-09 | 2009-10 | 2010-11 | 2011-12 (YTD)* | |
| ING Dividend Yield (G) | 21.6 | -31.8 | 117.4 | 17.5 | -2.5 |
| BSE-200 | 24.1 | -41.0 | 92.9 | 8.1 | -8.1 |
Further even if we assess over how the fund has performed on a year-on-year basis, the table above makes it evident that barring the year 2007-08; IDYF has outperformed its benchmark in 4 out of last 5 years.
Performance across Market Cycles
| BULL PHASE | BEAR PHASE | BULL PHASE | CORRECTIVE PHASE | |
| Date Range | 24-Oct-2005 | 09-Jan-2008 | 09-Mar-2009 | 05-Nov-2010 |
| ING Dividend Yield (G) | 32.4 | -51.2 | 102.8 | -9.4 |
| BSE-200 | 56.8 | -59.0 | 84.4 | -13.3 |
It is noteworthy that the exuberant bull market of 2005-08 made a mockery of dividend yield stocks as well as mutual funds investing in such stocks. Dividend Yield Funds were completely bulldozed by sector and growth oriented funds, as everyone was chasing 'growth', and 'value' wasn't available either. But then began the bear market of 2008-09, which took the Indian equity markets into a tizzy. Growth stocks melted under the heat of heavy selling, funds investing in such stocks doomed (in fact fell more than their benchmark with of course a few exceptions), and investors' too lost faith. In our view, chasing 'growth' investors' were looking foolish while being bullish. But an interesting observation; when the Indian equity markets went into a tizzy, value funds and dividend yield funds in particular, regained their lost fame and IDYF was no exception to this.
The table above tells us how painful the first 2 years have been for IDYF. The fund underperformed its benchmark, BSE 200, by a significant margin. However, since then the fund has managed to break the shackles, and in the last bull phase as well under the corrective phase has been consistently performing well by beating its benchmark across market phases.
Fund Manager Profile
| Name of the Fund Manager | Mr Danesh Bharucha |
| Total Work Experience | N.A. |
| Managing the fund since | Mar-12 |
| Qualifications | B.com, MBA(Finance) |
As seen above the performance of ING Dividend Yield Fund has been extremely attractive, notably over last 5 years. The fund has not only beaten its benchmark, BSE 200 but also its peers. It has managed to outpace the competition quite convincingly by generating returns in excess of those generated by the category as a whole over 3-Yr and 5-Yr period. The fund generated 40.8% and 16.0% over 3-Yr and 5-Yr, as against the category average of 34.7% and 11.4% over the respective time frames. Consistent performance year after year has made this fund a compelling proposition for those who wish to invest in a value style fund and also want to earn regular dividend income. Needless to say, no mutual fund can guarantee you any dividend though they might exhibit a track record of distributing dividends regularly. Thus given the consistent performance and also appealing portfolio characteristics, we believe the fund is worth a buy.
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