Use this screen to find income-generating stock funds for both taxable and nontaxable accounts.
Many investors seek the steady income provided by dividend-paying stocks, but companies from across the market-cap spectrum have been cutting dividends during 2008's nerve-jangling market swoon. True, high-yielding stocks haven't been any less volatile than the market as a whole in the past couple of years. Still, for those with long-term investment horizons, dividend-focused funds offer a great way to reap the rewards of income-generating stocks while minimizing the risk that a few companies will affect a client's entire portfolio.
Morningstar Advisor Workstation and Principia are helpful tools for sifting through the universe of stock funds to find higher-yielding portfolios. To set up this screen, we started by searching for domestic stock funds run by skilled stock-pickers. We screened for funds with top-third category rankings over the trailing 10-year period, making sure that the current management was responsible for that record.
Special Criteria = Distinct Portfolios Only
Morningstar Category = Domestic Stock
% Rank Cat 10 Yr <= 33
Manager Tenure (Longest) >= 10
Now, we need to narrow the field to stock funds with high yields. We'll use the prospective dividend yield percentage, which is the asset-weighted average of the prospective dividend yields of all the domestic stocks in the fund's portfolio as of the date of the most recent portfolio. This measure incorporates each stock's prospective dividend yield, which is calculated by dividing estimated annual regular dividends per share for the current fiscal year by the company's month-end stock price as of the portfolio date. Morningstar weights each portfolio holding by the percentage of domestic equity assets it represents so that larger positions have proportionately greater influence on the fund's dividend yield. Here, we set the screen for funds with prospective dividend yields greater than 2%. We wouldn't expect this criterion to give us only dividend-focused strategies, but it should help point us in the right direction.
Prospective Dividend Yield > 2.0
And because dividend-paying stocks tend to lead to greater taxable gains, investors using taxable accounts should consider funds with better aftertax records. One way to do this is to look for low tax-cost ratios. This ratio reflects the percentage-point reduction in an annualized return that resulted from income taxes. Here, we'll look for funds with tax cost ratios that fall under 1.25%
Tax Cost Ratio <= 1.25
Lastly, we required that the funds be open to new investments with expense ratios under 1.5% annually.