Another new entry in the dividend-centered fund category is the Alpine Dynamic Dividend Fund. While the fund is less than four months old, it is managed by a firm headed by Samuel Lieber, the highly regarded REIT investor and Evergreen founder whose firm has branched into other types of income-producing stocks.
Fund manager Jill Evans looks for companies of any size that have the potential to increase their dividends. Holdings range from mega-caps such as PNC Bank Corp. and Chevron Texaco to Bassett Furniture, whose outsized 5% yield dwarfs its tiny $184 million market capitalization.
"We put stocks into three baskets," Evans explains. "The first contains long-term growth and income stories. The second consists of turnaround situations in depressed stocks that pay high dividends. And the third is the dividend capture basket, which focuses on utilities, financials and other high-dividend, lower-growth situations."
The third basket, which accounts for about one-third of the portfolio, separates this fund from most of its peers. To capture as much dividend income as possible, Evans trades around a stock's ex-dividend date while holding the security long enough for its dividends to qualify for reduced federal tax rates. Although the strategy will increase portfolio turnover, Evans hopes to keep short-term gains to a minimum because the stocks in the dividend capture basket probably won't move up too much during the short holding period, and she plans to offset any gains with tax-loss selling. The fund anticipates an expense ratio of 1.35% after waivers, and 2.06% before. Evans says she is "targeting a net yield after expenses of 4%."
Among closed-end funds, Jacobs says that Preferred Income (PFD) and Preferred Income Opportunity (PFO), which invest in preferred stocks and trade on the NYSE, should appeal to fixed-income investors when they trade at par or at a discount to net asset value. While only about one-fourth of preferred stock distributions qualify for favorable tax treatment, at least three-quarters of the dividends produced by these funds last year qualified for the 15% rate. For more information, visit the funds' Web site at www.preferredincome.com.
Another noteworthy entry in the dividend income category comes from Barclays Global Investors, which launched the iShares Dow Jones Select Dividend Index Fund (DVY) in November. The fund bills itself as "the only exchange-traded fund investing solely in dividend-yielding stocks." It has a 70% correlation to the overall market, making it attractive to investors looking for a broad-based allocation of dividend-yielding stocks. Its current yield is 3.8%, and it has an expense ratio of 0.40%.
The index on which the fund is based invests in 50 of the highest-yielding companies (excluding REITs) in the Dow Jones Total Market Index, a broad-based index consisting of 1,800 stocks. To qualify for inclusion, the stocks must have a positive historical five-year dividend-per-share growth rate, a five-year average dividend payout percentage rate that is less than or equal to 60%, and annual average daily dollar trading volume greater than $1.5 million. The index is rebalanced once a year in December, and a company's weight is based on its indicated annual dividend. Altria heads the list of top holdings (as it often does in high-yield funds), with a 4.3% weighting and a 5.4% dividend yield, followed by Honeywell and General Motors.
Fund holdings represent a broad mix of large-cap, mid-cap and small-cap stocks. Financials and utilities are the largest sector, accounting for 32% and 21% of assets, respectively. The rest of the fund consists of companies in sectors such as basic materials, consumer cyclicals and energy. Although there is the potential for capital gains distributions when the fund rebalances each year or deletes a company that skips a dividend, Barclays says it will use tax-loss harvesting to minimize or avoid distributions.
Other companies are positioning themselves to offer investment products designed to maximize qualified dividends. In early December Mergent, a leading provider of financial information on public companies, created the Dividend Achievers Index. The index, derived from the Dividend Achievers service originated by Moody's Investors Service in 1979, includes companies that have increased their regular dividends for ten years or more and that meet certain other financial criteria. According to a Mergent press release, "The underlying index and methodology will provide a well-defined foundation for investment products such as ETFs, open or closed-end funds, UITs and derivatives. Mergent is currently evaluating licensing opportunities."