With so many companies either declaring special dividends or moving up their ex-dividend date in an effort to beat the taxman should we go over the fiscal cliff, MoneyShow’s Tom Aspray takes a look at top-performing equity-income funds, which can provide alternatives to investing in specific income-producing stocks.
The stampede out of dividend paying stocks started in the middle of October, and in hindsight, was probably the most accurate poll of how the election would turn out. The slide was well underway when Barron’s cover story Best 25 Dividend Funds was released on November 5. The subscriber-only article discusses the recent popularity of these funds, ranks the top 25 by three-year returns, and interviews several of the managers.
For those who do not have the time or capital to invest in a group of income-producing stocks, these can be an attractive alternative. If you are confident about the overall direction of the stock market, they can be used as a diversified way to boost the return of your portfolio.
It is important that you do your research as the managers of these funds often employ quite different styles. Some mangers invest only in large caps, others favor mid caps and some look overseas. Morningstar.com is one of the best places to do your research as they provide a wealth of information for free and even more in their premium services.
It is important that if you are considering any of these funds that you look at their historical price volatility. This chart from Morningstar features Vanguard Equity Income Inc. (VEIPX) and tracks the value of $10,000 invested at the start of 2008 (point 1). The chart shows the steady decline into early 2009 as the fund lost close to 50% of its value (point 2). Of course, it was clear from a technical perspective by early in 2008 that we were in a bear market so this was not the time to invest.
One should also note that the $10,000 investment is now back to $12,000 (point 3). I have selected four no-load funds from the list as in my opinion there is no justification for paying 5% or more upfront to purchase any fund. Today’s charts come from StockCharts.com using the relative performance analysis that I explained in “Learn to Drive Your Own 401k”. Comparing these funds to the performance of the S&P 500 or Spyder Trust (SPY) can help you find the top funds.
Chart Analysis: Vanguard Equity Income Inc. (VEIPX) is the third best fund in Barron’s ranking with a three year total return of 15.3%. I have also included some pertinent data from Morningstar above the chart showing that VEIPX yields 2.75%, expenses of 0.30%, a minimum investment of $3000, and is a five-star fund.
The Rochdale Dividend & Income (RIMHX) is a large value fund, yielding 3.63%, which has relatively high expenses of 1.40%. It has a lower minimum investment of $1,000 and is also a five-star fund. Its major holdings are quite different from those of VEIPX.
NEXT PAGE: Two Market Leading Funds