(Dow Jones) Paul Alan Davis, manager of the Schwab Dividend Equity Fund (SWDSX), is sticking to stocks in companies that are sitting on big cash reserves, do business in many places and have a track record of announcing pleasant surprises.

That might strike investors as sound philosophy, but it's not sure-fire. As stocks in beleaguered sectors like retail and car manufacturing have soared at times since March, albeit from basement-level prices, Davis's $1.4 billion fund year-to-date has about a 15.9% return as of Wednesday, putting it about 6 percentage points below its peer category, according to Morningstar.

But while other managers have raced into hot stocks, Davis has been sticking to staid names like J.P. Morgan Chase & Co. (JPM), Hewlett-Packard Co. (HPQ) and Occidental Petroleum Corp. (OXY).

"That's left us behind a little bit," says Davis, "but we feel like our period to shine may be coming again soon."

History is on Davis's side. Schwab's Dividend Equity fund, rated four stars by Morningstar, has been good to its long-term investors. By sticking to companies that pay healthy dividends - and show promise to keep doing so - Davis's fund has turned in annualized five-year returns of about 1.6% as of Wednesday, better than its peer group by 1.64 percentage points, according to Morningstar. Those returns were also less volatile than large-cap value funds as a whole, as of the end of November, according to Morningstar.

One reason for the fund's smoother returns could be Davis's focus on companies that have stable revenue streams and records of posting profits that beat analysts' expectations.

Two examples are International Business Machines Corp. (IBM) and Hewlett-Packard. Davis says both technology companies' earnings often exceed analysts' forecasts. And by sitting on strong cash reserves, Davis said both companies also avoided the perils of taking on short-term debt, which during the credit crisis has weighed mightily on other companies.

In the search for steady earnings, Davis's research team also tries to ferret out companies that have spread their business across various regions and countries, insulating them from a single market's economic woes. One example is Occidental which, Davis says, "shines in geographic diversification." The stock is up more than 25% this year.

Picking dividend-paying stocks has grown more perilous in recent quarters as some companies, especially banks and financial firms, have shrunk the checks they write to investors in order to preserve cash and endure the financial crisis. But Davis sounds determined to keep his investors in steady stocks.

"Maybe it's not as sexy as chasing those retailers that are up four to five times," says Davis. But "we'll stick to what we know."


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