Need Yield? These Stock Funds Have Income
Try this screen for dividend-seeking funds with winning long-term records.
Many investors seek the steady income provided by dividend-paying stocks, but companies from across the market-cap spectrum have been cutting dividends during this year's nerve-jangling market swoon. As Morningstar DividendInvestor editor Josh Peters explained in a recent article, high-yielding stocks have been more volatile than the market as a whole in the past couple years. Still, for those with long-term investment horizons, dividend-focused funds offer a great way to reap the rewards of income-generating stocks while minimizing the risk that company-specific problems will affect your entire portfolio.
Using the Premium Fund Screener, we searched for domestic-stock funds run by skilled stock-pickers. We screened for funds with top-third category rankings over the trailing 10-year period, making sure that the current management was responsible for that record.
We also zeroed in on funds with high yields. Mutual fund yields are an annual percentage measure of income (dividends and interest) earned by the portfolio's holdings, net of the fund's expenses. The Premium Fund Screener allows you to search for trailing 12-month yield, which is calculated by taking the weighted average of the yields of the stocks (or the funds if it's a fund of funds) in the portfolio for that time frame. Here, we set the screen for funds with trailing 12-month yields above the category average. We wouldn't expect this criterion to give us only dividend-focused strategies, but it should help point us in the right direction. Lastly, we required that the funds be open to new investments of $25,000 or less, with below-average expense ratios.
As of Dec. 2, 2008, the Premium Screener returned 26 domestic stock funds. To see the results, click here.
One word of warning here: Dividend-paying stocks tend to lead to greater taxable gains, so investors using taxable accounts should consider funds with better aftertax records. One way to do this is to look for low tax-cost ratios (1% or less is a suitable range). This ratio reflects the percentage-point reduction in an annualized return that results from income taxes.
One of the more tax-efficient funds on this list with a great long-term record is Royce Special Equity (RYSEX). An Analyst Pick in the small-value category, this relatively compact portfolio of roughly 60 stocks has more of a dividend focus than most peers. Manager Charlie Dreifus keeps a decent stake of micro-cap stocks in this portfolio, and their added risks have been muted by Dreifus' insistence on clean balance sheets and preference for cash-cow businesses and dividend-payers that he can hang on to for years. This strategy has also kept the fund's losses to 26% for the year to date ended Nov. 24, 2008, while the typical peer has shed 40%.
Another interesting option is Yacktman (YACKX). Veteran investor Don Yacktman has run this large-value fund since its 1992 inception, and he is assisted by his son Stephen. The team focuses on firms trading at bargain prices with low debt levels, which kept the fund out of tech stocks during the Internet bubble and out of financials more recently. Instead, the portfolio has been awash with dividend-paying consumer staples names such as Coca-Cola (KO), Proctor & Gamble (PG), and Clorox (CLX). The Yacktmans' focus on these annuitylike businesses hasn't always kept the fund at the head of the pack, especially during bull markets, but it has cushioned the blow during 2008's downturn and during the bear market from 2000 to 2002. The added stability has translated to some great long-term gains for patient shareholders.
Finally, we'd highlight Pioneer Equity Income (PEQIX), which strives to deliver a yield greater than the S&P 500 Index on a quarterly basis after expenses. One of the purer dividend-focused strategies from this list, the fund has consistently achieved this goal in addition to offering index-beating returns over the long term. Manager John Carey is patient with his picks for this fund, which tend to come from the dividend-rich financials, utilities, and energy sectors. That said, he has been quick to cut stocks that no longer offer attractive dividend yields, as was the case with Deere (DE) in mid-2007. Like the Yacktman fund, this one is built more for comfort than speed, so investors need patience to reap the rewards of Carey's dividend-paying picks.
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Karin Anderson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.