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Dividend Funds That Live Up to Their Names

Four equity funds with consistent records of investing in high-yielding stocks.

Greg Carlson, 08/08/2011

After a dry spell in the go-go era of the late 1990s, it's become more common in recent years for companies to pay a dividend to holders of their equity. Microsoft MSFT helped kick off a trend when it started issuing dividends several years ago, and other cash-rich firms have followed suit. True, at 2%, the yield of the S&P 500 Index still isn't exactly lofty, but that's double the benchmark's yield a decade ago.

Unfortunately, many actively managed funds, even those that appear to have a mandate to seek out dividends, still give shareholders only paltry payouts. For example, less than half of the funds with "dividend" in their names that hold at least 90% of their asset in stocks recently boasted either a one-month or 12-month trailing yield of more than 2% net of fees. For yield-seeking investors, we've tracked down several stock funds with a consistent record of paying above-average dividends that also have experienced skippers and solid track records.

Vanguard Equity-Income VEIPX
This large-value fund at the end of July had a healthy 12-month payout of 2.72% and a one-month yield of 2.86%. It doesn't attempt to boost its yield by holding distressed companies. Indeed, Michael Reckmeyer of Wellington Management (who runs 60% of the fund) and Vanguard's quantitative investing group (which manages the rest) typically stick with companies that have solid balance sheets and generate plenty of cash. It has been a winner over the short and long haul, and its low (0.31%) expense ratio lets more of its holdings' dividends flow through to shareholders.

Allianz NFJ Dividend Value PEIDX
Much like the Vanguard fund, this one focuses on cheap dividend-payers. The management team here also favors financially sturdy companies, as evidenced by the portfolio's below-average debt/market-capitalization ratio. A focus on big, steady companies led to a poor relative showing in 2009's big bounceback rally led by cyclicals, thus denting the fund's five-year record. But it has delivered the goods over lead skipper Ben Fischer's 11-year tenure. The high minimum Institutional share class' modest fees have boosted its yield (3.04% over 12 months), but the fund's no-load D shares don't cost much more.

American Beacon International Equity AAIPX
This broadly diversified foreign large-value fund employs four subadvisors who don't explicitly seek yield, but it's boasted a healthy payout for years. Its recent 1.85% 12-month yield is a reflection of the relatively attractive valuations of dividend payers, the fund's well-below-average expense ratio, and the fact that non-U.S. firms often sport solid yields. (Indeed, the MSCI EAFE Index's yield exceeds that of the S&P 500 by a full percentage point.) The fund has beaten roughly two thirds of its peers in the past decade with almost all of the same subadvisors in place.

American Funds International Growth and Income IGAAX
This is a young fund (it won't hit its third birthday until October 2011), but it boasts a fine pedigree. Its three managers are backed by the same huge team of analysts that have played a big role in the success of American's other foreign- and world-stock funds, and one--Carl Kawaja--is a 20-year firm veteran who also serves as a manager on Analyst Pick American Funds EuroPacific Growth AEPGX. This fund aims for a pre-expense-ratio yield of 3.5%--its 2.7% one-month and 3.3% 12-month yields are net of its 0.93% expense ratio. While that lofty target has led to sizable stakes in utilities and telecom (where dividend payers are the norm), the overall quality of the fund's holdings has been solid. The fund is off to a strong start in the foreign large-value category.

A version of this article originally ran in Morningstar FundInvestor.


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