However, investors could run into trouble if taxes go up on dividend income. As part of an effort to bring the nation's debt under control, President Obama in mid-February called for significantly higher taxes on stock dividends in the 2013 budget.
Under that proposal, which would take effect next year, households earning more than $250,000 would see the tax rate on dividends increase from its current 15% to the highest rate on taxable income. Administration officials believe the move would generate some $200 billion over a decade.
Fischer thinks a higher tax rate on dividends might have a negative short-term impact, but points out that dividend-paying stocks did well long before 2003 tax relief legislation lowered the rate on qualified dividends. "The relative advantage of dividend-paying stocks doesn't go away just because the tax rate changes," he says. And of course, he adds, the increase in the dividend tax is by no means certain in Washington's stalemate environment.
Which Dividend Payers Will Pay Off?
Stocks with above-average dividends are a diverse group with different prospects and performance characteristics. They range from slow-growth stalwarts such as electric utilities to industries with better earnings growth prospects, such as information technology.
In addition to yields, Fischer also pays close attention to valuations and compares characteristics such as price/earnings ratios. He believes that investors piling into electric and gas utilities, as well as telecommunications companies, aren't considering their lofty prices. As a result, the fund is underweight in those areas relative to its benchmark, the Russell 1000 Value Index.
"These sectors are selling at 15 to 16 times next year's earnings," he says. "They're not areas I would consider to be attractively valued."
Morningstar analyst Katie Rushkewicz Reichart noted in a recent report that an underweight position in utilities hurt the fund last year, when the sector had a strong showing. Fischer also put a dent in performance when he sold some high-yielding telecoms such as CenturyLink after valuations rose to levels he considered unattractive, and moved into lower-yielding but more reasonably priced names such as Freeport-McMoRan.
"Moves like that have made the fund less defensive and more cyclical recently," Rushkewicz Reichart observed. "But they've also kept the fund's P/E and other valuation metrics below the benchmark's and most competitors."
Although the strict value discipline causes the fund to lag from time to time, it has meant strong performance for patient investors. From its inception in 2000 through the end of last year, the fund's 6.33% annualized return, based on net asset value, outperformed its benchmark by nearly 3 percentage points.
Fischer's risk-averse strategy has also prompted him to keep a light presence in the financial sector, which he believes is still susceptible to a sluggish economy. "One of the best examples of ugly is Bank of America," he says.