Desktop Stock Ticker | 8 Dividend-Focused Funds Up Over 10% in 2009

8 Dividend-Focused Funds Up Over 10% in 2009

In tough times, dividends have provided stock ticker investors with a bit of a cushion against a falling market. The payments companies hand back to their shareholders each year can often mean the difference between falling into the red and hovering in the black.

During the downturn, companies have been trimming or suspending their dividend payments at record levels, according to data compiled by Standard & Poor’s.

The cuts and suspensions were particularly evident in the ailing financial sector, known for its long history of reliable, healthy dividends. A similar situation is playing out across the investing landscape. In February, The New York Times Company (NYT) announced it would suspend its dividend. Other companies including General Electric (GE), Lincoln National (LNC), Motorola (MOT) and Dow Chemical (DOW) have resorted to similar tactics.

The dividend cuts have made stock ticker picking difficult for a group of mutual funds in Lipper’s “equity income” category. These funds typically hunt for dividend-paying stock tickers trading on the cheap. There are 296 of them in our screener tool. We narrowed that universe by disqualifying those that charged a sales load and focused instead on the ones that levied cheap annual fees and sported top-tier performance track records over the trailing three- and five-year time periods. We were left with eight funds.

There are a few powerful arguments for favoring dividends. Studies have shown that dividends provide the bulk of stock ticker market returns over the long haul. Rob Arnott, the founder of Research Affiliates, a research-intensive investment company in Newport Beach, Calif., found that high dividend yields also tend to signal higher earnings. Finally, a Bush administration law gives dividends favorable tax treatment.

All of those factors play into the hands of so-called equity income funds. These offerings typically try to build portfolios that have a dividend yield greater than that of the S&P 500. (The S&P 500’s current yield is around 2.5%.) The strategy is designed to generate returns in two ways: First, a fund’s total value increases when the stock tickers it owns increase in value; at the same time, the dividends contribute a few additional percentage points to the total return. These funds are often favored by retirees because they can appreciate while providing an income stream.

But investors should remember that dividends aren’t guaranteed. Many financial firms that took bailout money from the government were forced to cut or suspend their dividend payments. Because financial firms were a big part of the S&P 500, their demise hurt even conservative index fund investors. It is still unclear when those payments will return. That’s why Scott Schluederberg, a portfolio manager with Hardesty Capital Management in Baltimore, prefers to pick and choose his dividend-paying stock tickers instead of owning a static mutual fund.

“We saw something unusual with the government bailout,” Schluederberg says. However, even before Washington stepped in, the Bush-era law had given a tax advantage to dividends, and “a lot of companies hadn’t foreseen a recession and increased their dividends higher than what was sustainable through a downturn,” he says.

One equity income fund that consistently makes our table is Wasatch 1st Source Income Equity (FMIEX). This fund has strong management, low fees and its return an average annual 6.9% over the last decade, good enough for the top spot in Morningstar’s large value category.

The Criteria: We screen Lipper’d equity income category for funds that were open to new money, required a minimum investment under $5,000 and charged an annual expense ratio under 1.5%. In addition, the funds had to have track records during the trailing three- and five-year time periods that put them in the top 40% of the category. As usual, we did not include load funds.

Dividend Hunters
Ticker Fund Name Total Net
($ millions)
Source: Lipper
Note: Data as of Sept. 10, 2009
AMANX Amana Income 807.9 14.75 3.36 9.16 1.33
GSFTX Columbia Dividend Income 982.9 10.00 -2.47 3.36 0.80
GABEX Gabelli Equity Income 971.9 21.71 -2.05 3.55 1.43
NSEIX Nicholas Equity Income 45.5 21.73 2.35 5.10 0.90
PRBLX Parnassus Equity Income 1693.7 15.46 2.73 4.69 0.99
RYDVX Royce Dividend Value 8.9 28.99 -0.78 4.72 1.49
VDIGX Vanguard Dividend Growth 2089.6 12.07 -0.70 3.60 0.36
FMIEX Wasatch-1st Source Income Equity 1261.7 16.20 -0.34 5.90 1.04

Fund Type = Equity Income
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) <= 40
Annualized 5-Year Return (%) = Display Only
Rank in Classification (%) (5 year performance) <= 40
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= $5,000
Open to New Investors = Yes
Year-to-Date Return (%) = Display Only

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