Dividend Yield Fund

There are two ways by which you get returns from a stock, one appreciation on the share price and two the dividend which the company declares from time to time.

Dividend Yield Funds primarily focus on companies that pay high or consistent dividends. These companies are generally sound large business houses (Bluechip companies), having strong and proven business models and cash generating ability. They have a record of rewarding shareholders with consistent dividend declarations. Stocks of such companies generally have low betas i.e. the stocks of this nature rise and fall less than the market. This fund should thus be less volatile. These funds are positioned as a lower risk funds as compared to a diversified growth fund.

Technically, Dividend yield is the term used for the purpose of calculation of % yield (return) by way of dividend to the share price of the stock.
Formula =  the dividend paid by the company / market price of share
During a bull runs, most investors tend to ignore high dividend yield stocks. Not by choice but by the virtue of the more lucrative high growth stocks.  dividend yield stocks  tend to rise and fall less in comparison to the high growth stocks but provide a cushion in the bear markets. Companies that pays a substantial portion of its earnings in form of dividends is reinvesting less in the business and, wish to grow at a slower pace, therefore lower earnings growth.

High dividend yield stocks tend to be large cap / long standing / cash rich companies. After all, only those companies which are financially healthy can pay consistent dividends.

It may not be as easy as it sounds, most times dividend yields can be deceiving, since it is a function of the amount a company pays out over the trailing 12-months period divided by its share price.  Yields will  fluctuate if a share price moves up or down in bear markets when stock prices are low it might show higher dividend yield than the real and in bull markets a good dividend yield stock may show out to be poor stock. The fund manger needs to be extra careful in picking up companies, which tend to generate lot of cash with modest, but steady growth. Past researches have shown that there are only a select few stocks available in the market which can be considered as good dividend yield stocks. Only 5 out of 10 stocks which have paid good dividends in strong economic cycles are worth being in the portfolio. As dividend yield is based on the past performance, it is hardly an indication of the future profitability and sustainability of dividend. Therefore a true Dividend Yield fund might not be well diversified.
Typically, a dividend yield scheme tries to predominantly invest majority of its assets in a well-diversified portfolio of companies with relatively high dividend yield, which provides a steady stream of cash flows by way of dividend. Thus, dividends received from these companies are the major earnings for the scheme.