2 Dividend Payers to Ease Volatility

01/18/2012 7:00 am EST


It’s best to use various strategies, such as covered calls and dividends, to boost returns, says fund manager Dan Neiman. He describes his methodology to MoneyShow.com, and shares two picks from his holdings.

Kate Stalter: I’m talking today with Dan Neiman of the Neiman Large-Cap Value Fund (NEIMX). Dan, can you set the stage for us today by telling us a little bit about your fund’s objective?

Dan Neiman: The Neiman Large-Cap Value Fund uses some very fundamental principles when we talk about investing. We’re looking at a bottom-up approach, we’re looking at things like low debt, low P/E, good price-to-book, growing revenues and earnings—consistently growing those revenues and earnings, not just flying up one year and then peeling off the next year.

We’re looking a blue-chip companies that pay a good solid dividend, and we limit the stocks we choose to be in our fund to just dividend-paying stocks.

Kate Stalter: I understand that you also incorporate a covered-call strategy. Can you say a little about that?

Dan Neiman: Sure. What we do with a covered call strategy is one: The covered call itself is the most conservative investment other than just a buy-and-hold strategy that most mutual-fund managers use.

The covered call is also unique, because you get an option premium paid to you when you sell the call. And what we try to do with that is enhance the dividend that we’re making on the stock itself.

If we’re getting, let’s say, a 2% dividend on the stock, and we can yield about 2% on the covered call option premium portion, then we’re doubling our yield in effect on a particular issue.

Kate Stalter: I was going to ask you about dividends. That’s a key part of your philosophy; tell us about that.

Dan Neiman: It’s key because what it does is it lowers volatility. Anytime you can, you’re not guaranteeing a return, but you’re going to bring in a certain amount on, say, a Chevron (CVX), one of the top holdings in our fund.

Chevron pays around a 3% dividend yield, so if Chevron stays flat or the market stays flat, or year-over-year Chevron doesn’t move a lot, we’re going to continue to make that 3% on the dividend.

And if we have a nice basket of stocks—the average yield in our fund right now, on all the stocks in our fund, is right around 2%. So we feel that that 2% that we’re getting really limits volatility, reduces the risk investors have in buying blue-chip companies.

Kate Stalter: That’s a strategy that got talked about a lot in 2011 with all the market volatility. But you were already using that well before that began, weren’t you?

Dan Neiman: Yeah, our fund has been in existence for nine years. We started in 2003, and probably our best performing year vs. the market was in 2008, when the market was down. That’s when it was down 38%, 39%, and we were down 22%.

The combination of dividends, consistently giving dividends and average costing into those stocks that are sort of dropping and the yield gets higher and higher, and then selling covered calls and strategizing the covered call selling around what the market is doing, has really benefited us, as far as volatility goes.

Kate Stalter: Tell us about some of the holdings in the funds, then.

Dan Neiman: I talked about Chevron already. It’s one of my favorite holdings that we have. We have 40 stocks in our fund and we try to keep the number of stocks we have to right around 40.

Chevron is a good name, P/E around eight to nine times earnings, not historic lows by any means—it’s about their average—but they went up 20% last year in 2011, and we feel that just with the low debt structure they have, the nice healthy earnings and revenues, that Chevron’s a good company to continue to hold in our fund.

If you want to talk about a couple of other names, I know financials are big, when we talk about value and we talk about dividends. We do have one financial stock, and that is the Bank of Montreal (BMO). We’ve held this for quite some time. It didn’t have the best year last year, but it does have a pushing 5% dividend yield, and for a bank it’s got relatively good debt to equity.

We see the recent acquisitions Bank of Montreal is doing in the United States actually has benefited them, and will continue to benefit shareholders I think, especially in a financial stock like that.

Kate Stalter: Dan, what would be your advice for individual investors who are still very frustrated with the volatile market in the last year or so? What would you suggest that they do at this point?

Dan Neiman: Well, besides invest in the Neiman Large-Cap Value Fund? I think that what investors really should do, and it’s what I do with my own money, is have a nice balanced allocation amongst large-cap, mid-cap, small-cap, with some international exposure, some commodity exposure, real estate exposure…

But as a whole, if you look at volatility, I think we’re going to continue to have the big upswings and downswings. Especially, we’re going through now an election year, and the European economy—the recession there—I think will continue to drive these markets up and down.

I think dividend-paying stocks are a good way, especially if you can find a professional manager to manage that for you. You don’t have to guess when, or second-guess yourself as an investor. I think a lot of investors do that, and they’re playing that sort of up-and-down, and they’re trying to play momentum, and you just get burned in the long run.

If you’re trying to pick what’s hot now, it’s probably not hot anymore. If you’re trying to get out of what’s not, it’s probably something you should be actually be getting into coming up, if that makes sense.

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