Friday, October 05, 2007

Dividend Growth Investing From The Perspective Of A Mutual Fund Manager published an article advising readers how to gain access to a no-load mutual fund that is managed by the same manager that manages a nearly identical loaded fund. In the No-Load Clone article the load fund referenced is Cohen & Steers Dividend Value Fund (DVFAX) versus the no-load Harbor Large Cap Value (HILVX). Both funds are managed by the highly respected dividend growth manager, Rick Helm.

Some dividend growth highlights from the article:
  • When Ned Davis Research calculated the returns of stocks in Standard & Poor's 500-stock index from January 1972 through August 2007, dividend growers won hands down. This group of stocks returned an annualized 10.9%, good enough to produce a 40-fold gain over the span. The S&P 500, by comparison, returned an annualized 8.5% during the same period; non-dividend payers earned a pathetic 2.4% annualized.
  • Here's why Helms likes companies that raise their dividends consistently. He says it demonstrates management's confidence in the company's business model and future cash flows and signals confidence in the outlook.
  • Unlike share buy-backs, which may be one-time events, steady growth in dividend distributions encourages companies to be more careful with their cash and shows commitment to shareholders. After all, you need to generate steady cash flows to fund a quarterly dividend commitment. "There's a great deal of information being communicated by companies when they raise their dividends," says Seattle-based Helm.
  • He uses a three-step process to fill his portfolio, which currently holds 80 stocks. First, he identifies what he considers the highest-quality companies, with the soundest business models, in each sector.
  • Then he analyzes these companies for their dividend profiles. He not only seeks steady dividend growth, but also prefers companies with relatively low payout ratios (dividends as a percentage of earnings; companies with low payout ratios have plenty of room to boost dividends) that are reinvesting enough money to expand their businesses. For instance, a company that yields 10% but grows only 1% a year would not make the cut. An ideal investment might be a company that has completed an aggressive capital-investment program and is scaling back capital expenditures, which is likely to generate more-abundant cash flow.
  • One reason a dividend-growth strategy performs over the long term is that companies of quality and consistency tend to hold up well in bear markets. "Our strategy has done well in down, choppy and rising markets," says Helm. However, he says, the strategy will lag in "frothy markets, where quality doesn't hold up."

A No-Load Clone of a Top-Notch Fund
By: Andrew Tanzer
October 4, 2007

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