These Funds Are Tops for Dividends
A few of our favorites that prefer a bird in the hand.
A few of our favorites that prefer a bird in the hand.
Dividend-centric investment strategies are back. True, investing for dividends is by no means a new approach, but it fell out of favor during the 1980s and 1990s, when companies and investors alike favored growth strategies over returning income to shareholders. A number of factors, including the market, a tax cut, and demographics, have helped dividends regain their popularity. The long value rally of recent years has helped bring attention to stable, income-producing companies. In 2003 the government made dividends friendlier to the tax-averse by slashing the dividend tax rate to 15%. (Unless extended, this tax relief will expire in 2010.) Finally, aging baby boomers have gotten more interested in current income as they approach retirement.
The general premise behind dividend-centric strategies has merit. Over the long haul, reinvested dividends have provided a big part of total return. An Ibbotson study shows that reinvested dividends accounted for 40% of total stock returns from 1926 to 2006. Dividends also impose financial discipline on companies. Dividend-paying companies tend to budget more carefully and avoid wasteful projects because investors will punish their stock if they don't reliably return profits to shareholders.
Dividend funds have enjoyed tailwinds during the value-driven bull market, and that won't last forever. Moreover, the fund industry has launched a lot of gimmicky dividend-focused offerings that you should avoid. (Does anyone really need Claymore/Zachs Yield Hog ETF (CVY)?) Still, given their long-term appeal, we thought we'd highlight a few of our favorites.
T. Rowe Price Equity Income (PRFDX)
This fund is an Analyst Pick in the large-value category. Longtime manager Brian Rogers targets beaten-down behemoths with healthy yields. Not all of Rogers' picks turn around quickly, so the fund can languish when its picks founder. Moreover, the fund typically lags its peers in growth-friendly markets. On the flip side, the value-conscious, dividend-focused approach gives the fund a cushion against falling stock prices in market downturns. Plus, over the long haul, Rogers has produced strong returns. The fund's 9.5% gain for 10 years ending July 17 outpaced 77% of its peers.
T. Rowe Price Dividend Growth (PRDGX)
This T. Rowe fund takes a slightly different tack. Manager Tom Huber looks for reasonable valuations and increasing dividends. Thus, he can invest more in the technology stocks, such as Intel (INTC), that pay small, but growing dividends. The fund's dividend focus has helped it better survive market downturns than its large-blend peers. In 2002, for example, the fund's 18% loss, while painful, was better than 73% of its rivals. With strong long-term returns as well, this offering is a sensible core holding.
Allianz NFJ Large Value (PNBAX)
NFJ Investment Group is a small firm focused exclusively on dividend investing. Its management team screens for dividend-paying stocks and reasonable valuations for each of the firm's six offerings. This disciplined approach can lag in speculative rallies (the firm's mutual funds did poorly in 1999, for example), but, with the help of reasonable expenses, it's paid off over the long haul. A number of its funds are closed to new investors, including Allianz NFJ Small Cap Value (PCVAX) and Allianz NFJ Dividend Value (PNEAX), but in the past few years the firm has introduced Allianz NFJ International Value (AFJAX), Allianz NFJ Large Cap Value (PNBAX), and Allianz NFJ Mid Cap Value , all of which are still open. Allianz NFJ Large Cap Value seems particularly well positioned, because it's focused on the long out-of-favor mega-caps.
Vanguard Dividend Appreciation ETF (VIG)
This exchange-traded fund (and conventional share class) is timely. Its benchmark, Dividend Achievers Select Index, is a market-cap-weighted index of companies that have increased their dividends in each of the last 10 years, so the fund is tilted toward the undervalued, financially solid behemoths. Some income-oriented investors might be put off by the fund's yield, which pales in comparison with those of some of its dividend-focused competitors, such as PowerShares HighYield Dividend Achievers' (PEY), which offers a 3.46% yield. However, this fund has a few advantages over its competitors. The index applies a quant screen devised by Vanguard to the broad Dividend Achievers Index to weed out companies whose dividends may be unsustainable. Plus, like all Vanguard offerings, the ETF's 0.27% expense ratio is low, which gives it an edge over most of its rivals. (Unless you trade too much, then the commission you pay to buy and sell ETFs will add up.)
WisdomTree LargeCap Dividend ETF (DLN)
This ETF is a bit different. It tracks the WisdomTree LargeCap Dividend Index, which ranks stocks by cash dividends. True, ranking stocks by cash dividend instead of dividend yield, like the popular iShares Dow Jones Select Dividend Index (DVY) does, means the ETF's yield isn't as competitive. However, the ETF is more diversified than the iShares offering, which should allow for a smoother ride over the long haul. Moreover, the fund's 0.28% expense ratio, while not rock-bottom in the ETF realm, is extremely competitive relative to traditional funds' expense ratios.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals
and individual investors. These products and services are usually sold through
license agreements or subscriptions. Our investment management business generates
asset-based fees, which are calculated as a percentage of assets under management.
We also sell both admissions and sponsorship packages for our investment conferences
and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.