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Dividend Yield Funds: Investing Strategies
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What kind of an investment strategy do Dividend Yield schemes follow?
Dividend yield schemes offer limited protection in falling market scenarios as such dividend paying stocks usually do not fall as much as the broader market. These schemes focus on the cash generated by the companies in which they invest business and this provides for stable returns even in volatile market conditions.
The dividend yield on a stock is inversely related to its price – that is, when the dividend yield (pay out) is high the lower is the price of the stock and the other way round. When the market goes up and stock prices are high, the dividend yield falls. On the other side, when markets are falling and stock prices are low, dividend yields rise. In either case, fund managers manage to make profits – in the first case from high prices and in the second case from higher yields.
Fund managers of such schemes prefer to invest in stocks with higher dividend yields, which are more attractive and generate stable dividend income during bear markets. There is a built-in self-correcting mechanism for dividend yield stocks and this balances the assets, enabling such schemes to generate stable returns.
Fund manager also pick stocks that apart from paying regular dividends have potential for capital appreciation. Therefore, one can expect to earn a decent recurring income and record capital gains over time.
How much dividend has to be paid out by a company depends on its earnings as well the outlook for the company, industry sector and the economy in general. A part of the profits of any company is ploughed back into the business and if there is any surplus that will be distributed to shareholders.
Usually a high growth will not be able to pay good dividends because it will be using all available resources to grow the business. On the other hand, a company that has a stable business and is growing at an above average rate would probably pay a good dividend.
In a nutshell, dividend yield stocks provide a cushion in the form of a stable dividend income during bear phases, while they generate capital appreciation during bull phases. Therefore, investors with any kind of risk appetite can consider investing in these schemes.
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