Dividend-paying stocks and funds have an added allure: Their stable income stream is especially valued by aging baby boomers and retirees (since bonds and money market funds don't pay much interest these days). "If a company has healthy operating cash flows, it has the ability to pay dividends," says Sam Sudame, CFA, CFP and chief investment officer of Shultz Financial Group Inc. in Reno, Nev. Sudame likes the Matthews Asia Pacific Equity Income Fund (MAPIX), which, despite being down 27.15% this year through mid-October, is in the top percentile in Morningstar's Asia-Pacific fund category.
"The investment return is more dependent on stable dividends rather than unstable capital gains," Sudame says. "More to the point-the underlying fundamentals of a business tend to be more stable than the price of a stock, and those business fundamentals are what guarantees the stable dividend. For retirees, that is essential."
Wealth manager Aaron Skloff, CEO of Skloff Financial Group, Berkeley Heights, N.J., likes Thornburg Investment Income Builder Fund (TIBAX), where he's been putting clients for three years because of the "high quality of the companies the managers screen." As an added kicker, he values the fund's diversification.
At the end of the third quarter of this year, the fund paid out $1.04 in dividends on its Class A shares, which as of mid-October equaled a yield of 7.1%. Manager Brad Kinkelaar and his team look for companies that have had an earnings growth rate of 19% this year. S&P 500 companies, by contrast, are expected to see an overall 6% decline in earnings.
Lipper characterizes the $3.1 billion Thornburg fund, which was launched in 2002, as a mixed target allocation growth fund. It was a top Lipper performer up to this year, but it has suffered in 2008 after a foray into telecom stocks. The fund was down 31.4% for the year through mid-October.
"We basically invested 17% of our fund in what turned out to be the worst-performing industry so far this year," laments Cliff Remily, an associate portfolio manager on the Thornburg fund. "Although our performance has been negatively attributable to that, I'm very comfortable with the underlying businesses in these companies."
In Asia, the situation is somewhat different. "Dividends as a whole are still growing in Asia, whereas in Europe and the U.S. they're becoming increasingly hard to come by, especially in the financial area," says Jesper Madsen, the portfolio manager of the Matthews Asia Pacific fund, who scouts companies that can grow and maintain their dividend even in volatile periods.
Another fund group, Utopia Funds, allocates approximately 80% of its holdings to dividend-paying stocks. The four funds in its family, all of which launched in 2006, are the Utopia Growth Fund (UTGRX); the Utopia Core Fund (UTCRX); Utopia Core Conservative (UTCCX) and Utopia Yield Income Fund (UTYIX).
Utopia manager Paul Sutherland particularly likes Deutsche Telecom (DT), Germany's largest telecom company, which in mid-October was paying a dividend of 6.5%. The funds also contain a trio of foreign energy stocks: British Petroleum (BP), which yielded 7% as of mid-October; Royal Dutch Shell (RDS/B), yielding 6.1%; and ENI (E), yielding 7.5%.
The Tweedy, Browne Worldwide High Dividend Yield Value Fund (TBHDX), launched in September 2007, invests in U.S. and non-U.S. stocks predominantly in developed countries and typically holds between 30 to 40 stocks. A team of five partners and seven analysts manages the fund; decisions are made by consensus of the partners.
"We look worldwide for stocks with above-average yields that have demonstrated the ability to increase their dividends over time and are currently undervalued," says Bob Wyckoff, a managing director and member of Tweedy, Browne's investment committee. Even though the Tweedy Browne fund was down 26.63% for the year through mid-October, it still stands in the top 3% of Morningstar's world stock fund category.