Once a rarity, tech stocks are more common in funds with above-average yields.
George, a retired Chicago-area individual investor, recently called me with a
conundrum. He had a big portion of his seven-figure portfolio stashed in money
market funds earning bupkis. To get a little more yield, and maybe some
appreciation, he wanted to move some money to an equity-income fund. What did I
I think a lot of the fund, and I told George so. (Earlier this year I gave it a Silver Morningstar Analyst Rating, which is solid). Still, George's call worried me. Did he know dividend-paying stocks aren't money market or bond substitutes; that they could lose money; and that the strong trailing returns of funds like Vanguard Equity Income didn't presage future results? More importantly did he know what he would own?
A lot of income-seeking investors find themselves in George's predicament, and not all of them can answer those questions in the affirmative, especially the last one. Indeed, while George seemed to have a handle on the risks he was contemplating taking, he was surprised to learn the fund and other income-oriented stock funds in recent years have edged into areas that historically haven't been associated with dividends.
For instance, domestic-equity funds with above-S&P 500 yields and records of at least 10 years currently have more money, on average, in technology stocks and less in financials and utilities companies than they did a decade ago. That's a reflection of how dividend-focused managers' opportunity set has changed over the years. It also shows how yield-seeking investors like George can't take the traditional definition of equity-income stocks for granted.
Say "dividend-paying stock" and many investors are likely to think of
utilities, telecommunications, consumer goods, and financial companies. That's
still true, but more tech stocks to whom dividends were anathema at the turn of
the century are distributing cash to investors now. At the end of April 2012,
the information technology sector was the second-biggest contributor to the
S&P 500 Index's yield after consumer-staples stocks, up from fifth place in
2011 according to S&P indexes. A new dividend from the benchmark's largest
Meanwhile, many tech stocks have languished since their 2000 peaks, making
them fair game for fund managers who prefer dividends and low valuations.
Indeed, Vanguard Equity Income's tech helping has gone from the low single
digits to nearly 10% in the past 10 years. Other funds that put a priority on
dividend growth as well as yield, such as
- source: Morningstar Analysts