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By Christine Benz and Shannon Zimmerman | 09-05-2012 02:00 PM

Good Dividend Funds With an Active Touch

These actively managed, dividend-focused funds can be opportunistic as the chase for yield continues into passive products.

Christine Benz: Hi. I'm Christine Benz from Morningstar.com. Investors have been sending torrents of assets to exchange-traded funds that focus on dividend-paying stocks, but Morningstar associate director of fund analysis, Shannon Zimmerman thinks they shouldn't disregard actively managed dividend-focused products. Shannon, thank you so much for being here.

Shannon Zimmerman: Good to be with you, Christine.

Benz: So Shannon, why should investors consider actively managed funds, given that they typically will have significantly higher or at least somewhat higher expense ratios than ETFs do?

Zimmerman: Sure. Well big picture-wise, one reason that you might want to consider owning both--it's not an either/or proposition. You can own both indexed products and actively managed products. If you think about it just in terms of strategies, broadly speaking, those are two strategies; index, or passive investing, and actively managed investing are two different approaches to investing in the market. As with any strategy, the success will wax and wane over time. There'll be periods when indexing holds sway and there'll be periods when active management holds sway. I tend to think that, particularly when you get into asset classes where there have been bubbles or bubbles seem to be inflating--I think that's true right now of dividend-paying stocks, because people are scrambling after yield and they're pushing up the valuations of lot of companies that pay dividends--that's a good time to consider using an active manager who can be opportunistic in what seems to be an increasingly richly priced area of the market. If you go to that route, certainly there are a number of very talented long-term successful managers who work that space pretty effectively.

Benz: Shannon, there are really two key strains of dividend-focused mutual funds. One is sort of that tried-and-true strategy, usually a large-cap value manager using some sort of an equity-income strategy. Let's talk about what you think is a good example of that fund type, one that investors should consider.

Zimmerman: T. Rowe Price Equity Income is a good example of that type of fund. However, there are some limits to how closely that approach applies. Brian Rogers is a longtime manager and has a terrific track record versus his benchmark, certainly versus his category peers. He does have an equity-income mandate. But the fund, if you look at it right now, only yields around 2%, that's slightly higher, but only very slightly higher than the broad market. Wait a minute, this is an equity-income fund; shouldn't it have 3%, 4%, or 5%? Not the way that he does it. I mean, right now, that kind of yield is very difficult to come by, and Rogers is not a big risk-taker. He doesn't scramble after yield in a way that might allow him to get that level of payout at a level of risk that would be unacceptable to him in the context of this portfolio.

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