Dividend Yield category has offered better protection in a volatile market environment. The category in the last one year has outperformed the relative benchmark index by 6 percent while the diversified category has managed only 2 percent outperformance
The Dividend Yield fund category has been able to generate better returns against the benchmark index and the equity diversified category across various periods. Over the last five years, dividend yield fund category has generated an alpha (outperformance of index) of 8 percent whereas equity diversified category has managed an alpha of 1 percent. The Dividend Yield category during the last four and three years out-beat the diversified category significantly by generating an alpha of 9 percent and 7 percent respectively. Traditionally, higher dividend equities have offered better protection in a volatile market environment.
According to Dominic Rossi, CIO - Equities, Fidelity Global, “The dividend income offers a measure of protection to investors against market volatility. These companies are typically large, robust household names which may well prove to be a relatively safe place for investors when you see mounting stresses in the banking system.”
According to him, investors should focus on high-quality, defensive companies with stable and reliable earnings streams which pay high and sustainable dividends. Dividend Yield funds primarily invest in equities that boast good dividend yield and have sustainable operating cash flows with low leveraged financial statements. On the other hand, equity diversified funds predominantly invest in companies across various market capitalization and sectors. Dividend Yield funds classically do well during periods of market volatility and correction.