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Why Dividends

10 Questions with Daniel Peris, comanager of Federated Strategic Value Dividend SVAAX and author of The Strategic Dividend Investor (McGraw-Hill, 2011).

Morningstar Advisor, 10/17/2011

1. Give us the 15-second overview of The Strategic Dividend Investor.
Viewing the market as a business investment platform, rather than a place of "buy low, sell high, repeat frequently" speculation, leads naturally to focusing out the benefits of company ownership: a share of the profits distributed as dividends. Not surprisingly, long-term total returns are dominated by the basic dividend and dividend growth.

2. How would you describe the performance of your fund so far?
Delivering on our long-term goals of high yield, dividend growth, and attractive total return, in less-than-ideal circumstances. We're just quietly collecting our coupons and watching them grow over time.

3. Aren't capital gains important?
Of course, and over the long term, they are generated almost entirely by dividend growth. That's where we spend a lot of time analytically assessing a company's likely dividend growth rate.

4. How do you get dividend growth from companies that pay out most of their earnings?
Our portfolio companies on average pay out roughly two thirds of their earnings. The remaining amount is plenty for reinvestment that can generate additional dividend growth. The bigger challenge is justifying the less than 30% payout ratio of the rest of the market. That leaves a lot of money in the hands of empire-building CEOs, and the risk of spending money poorly increases the more you have of it.

5. With this latest recession scare, are you worried about dividend cuts?
Our process is built around providing a stable income stream that rises over time. So, in a sense, we're always worried about dividend cuts, in good times and bad. Fortunately, our focus on dividends tends naturally to lead toward less-cyclical companies.

6. What's your favorite high-yield sector right now?
Consistent with our low turnover, we don't rotate through sectors much. We've had notable weightings in consumer staples and telecommunications for years.

7. You sold out of banks a few years ago--good call, that. Do you have any interest in the sector as their dividends come back?
Having a dividend and having a meaningful dividend are not the same thing. Banks are not presently in the latter category, and it may be a while before they are.

8. What happens to high-yield stocks if interest rates go up? Or taxes on dividends?
Most of our companies have some pricing power, which would allow them to respond to the inflation that would lead to the rise of rates. The tax question is a lot more complicated. Suffice it to say here that dividend-focused investments have done very well under a variety of tax regimes.

9. How did you become such a big fan of dividends? I mean, not every fund manager goes to the trouble of writing a book extolling their principles.
I'm a historian who happens to work in the capital markets by day. When I first began in this business, I may have taken the various investment models presented to me at face value. But after I settled in at Federated, my instincts as a historian resurfaced. That led to investing for dividends and the book explaining why.

10. Is there some risk of boredom?
For the trader, yes. For the investor making long-term, businesslike decisions, not at all.

Interviewed on Aug. 22.

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