by Will Ashworth | September 12, 2013 1:15 pm
In a recent edition of Me and My Money — a weekly Globe and Mail business column that looks at the investing habits of average citizens — the paper featured a software designer with a penchant for dividend stocks that provide sustainable payouts.
It’s an excellent idea if I’ve ever seen one, but there’s just one problem: Not all of us are good at analyzing stocks. Some would rather hand the work over to a professional.
If you’re in the latter camp — and chances are good you are — consider getting your dividends the “lazy” way. Namely, these three mutual fund recommendations that yield at least 2.5% annually:
Trailing 12-Month Yield: 2.6%
My first recommendation — the Vanguard Wellington Fund (VWELX) — is a grandaddy of the mutual fund industry. At 84 years old, Wellington is the nation’s oldest balanced fund.
Morningstar gives Wellington a five-star “gold” rating, and that’s because of its consistent performance. VWELX is up almost 12% so far in 2013, and it has had only one negative year in the past 2011 — that was in 2008, when Wellington lost 22.3%. (But the S&P 500 lost 37%.) During the past 15 years, VWELX has achieved an annualized total return of 7.7%, which is 210 basis points higher than the index.
It’s important to understand that as a balanced fund, Wellington has a bond component that has played havoc with its performance in recent years. Not to worry, though — VWELX’s 103 stock holdings still represent 64% of its $75.1 billion portfolio. The fund’s top 10 holdings represent 15% of the overall portfolio, and are led by Wells Fargo (WFC) at 2.2%, followed by Exxon Mobil (XOM), JPMorgan (JPM), Merck (MRK) and Microsoft (MSFT).
Meanwhile, Wellington’s management fees are unsurprisingly low — as is Vanguard’s way — at just 0.25%, which is about 75% lower than other similar funds.
Vanguard’s reputation is hard to beat, as is Wellington’s performance. If you’re looking for something tried and true, this mutual fund is it.
Trailing 12-Month Yield: 3.1%
The goal of the Columbia Dividend Opportunity Fund (INUTX) is to generate a high level of current income by investing in companies that consistently increase their dividends.
I’d like to think it’s exactly the type of fund that the aforementioned software designer would own if he weren’t into individual stocks.
The three portfolio managers in charge of the mutual fund have a combined 79 years of experience running money. The fund is benchmarked against the Russell 1000 Value Index, and the managers look for stocks across a broad group of sectors with attractive valuations that generate strong free cash flow and also increase dividends.
Since implementing this strategy in 2004, Columbia Dividend Opportunity has delivered distributions greater than 150% of the S&P 500. While core inflation in the past nine years has averaged 2%, INUTX has been able to deliver distribution growth more than three times inflation at 6.9%. Although most of the 120 issues it invests in are equities, it does hold several fixed-income investments. Top holdings include General Electric (GE), JPMorgan and Chevron (CVX).
For an annual expense ratio of 1.1% (and a maximum sales charge of 5.75%), you get a group of seasoned veterans providing above-average returns, and a mutual fund that Morningstar rates at four stars. You could do much worse.
Trailing 12-Month Yield: 3.45%
My last recommendation comes from Federated Investors (FII), one of the largest investment managers in the country with $364 billion under management.
One of the many mutual funds FII offers is the Federated Strategic Value Dividend Fund (SVAAX), a $7 billion fund that seeks both dividend growth but also higher-yielding dividend stocks than the broader market.
Interestingly, despite a yield that’s higher than most dividend-focused funds, it turns over its entire portfolio just once every five years. That’s slower than either of my other recommendations.
The portfolio itself is composed of 37 holdings — nice and focused — with the top 10 accounting for 43% of the overall portfolio. All of these stocks are large caps with a median market cap of $72 billion. In other words, they’re big … we’re talking names like AT&T (T), ConocoPhillips (COP) and Duke Energy (DUK). Meanwhile, expenses run at 1.06%, with a maximum 5.5% load fee.
Although Morningstar only gives it a three-star rating, Strategic Value’s return since its inception in 2005 has been more than adequate. SVAAX’s performance doesn’t compare to the other two mutual funds, but if you’re looking for pure yield, Federated delivers.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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