A word caution for those who are going to do it on their own. Don't just pick up any stock that has recently declared dividend and has attractive dividend yield. This is because some companies may announce special dividend to distribute a one-time gain to investors or for achieving a milestone like golden jubilee year or sales of $1 billion. For example, Gujarat Gas recently declared a special dividend of . 12, and Bosch paid a special dividend of . 85 in June 2011. So when you are calculating dividend yield, don't forget to exclude such special dividends. One can choose to invest in stocks quoting at or above, say, an absolute number of 3% or use a relative yardstick such as dividend yield of the Sensex. Also, look into the business growth of the company. Remember, you are buying stocks to create wealth and not just to earn regular income in the form of dividend year after year.

The Funds

There are some dividend yield equity mutual fund schemes you can choose from. UTI Dividend Yield Fund (. 3,451 crore) is the largest scheme in the category, followed by Birla Sunlife Dividend yield Plus Fund (. 1,073 crore) as quarterly average assets under management as on December 31, 2011. Most schemes have managed to outperform the broad market represented by the BSE Sensex in the last five year (See Table). Birla Sunlife Dividend Yield Plus Fund has been the best performing fund in the category with 16.24% returns over last five years, according to Value Research, a mutual fund tracking entity.

 
These funds are more stable compared to the broader market. Risk, measured by standard deviation, in these funds are typically low in the long-term. Most of these schemes have scored better than Sensex over a three-year timeframe, with lower standard deviation. It means fund managers could ensure less risky portfolios here compared to broader markets. Though the picture is great on both returns and risk fronts, there are certain downsides.

Down sides

Not all good companies pay regular dividends. For example, high growth companies may not declare regular dividends to conserve capital. Also, capital intensive businesses prefer to conserve capital which in turn results in low or no dividends. A dividend yield fund cannot invest in such stocks. In a sharp recovery in markets, stock prices of capital intensive businesses may see quick up move resulting into relative underperformance of dividend yield funds in the short term, but over the long term these schemes deliver healthy risk-adjusted returns. A look at the long-term performance proves his point. Though capital-intensive businesses come in demand in economic upturn, they also suffer the most in recessionary times. Whereas, established businesses paying regular dividends always remain on investors' radar.