Richard Loth

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June 14, 2005
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A look at dividend-focused mutual funds

Last week's column discussed Jeremy Siegel's new book, "The Future for Investors," and was directed at stock investors. For Siegel, investing in dividend-paying stocks of "tried and true" companies is a winning investment strategy. Fund investors have this same opportunity through dividend-focused mutual funds.First, some perspective on this subject from Morningstar's Kunal Kapoor. He suggested recently in a June 2 article that investors should go beyond the search for the fund with the highest yield. Rather, "focus on funds that seek income only as part of an overall total return strategy." He adds, that "these funds are less likely to be less gimmicky, with investment strategies concocted by investors, not marketing folks."Second, Kapoor cites expenses as a particularly important consideration for dividend-oriented funds. He points out that "any advantage a high-yielding fund has on paper may quickly be wiped out if it also carries high expenses."Here are three good selections, two of which Kapoor mentioned in his article, for fund investors interested in dividend-focused investing:Vanguard Equity-Income (VEIPX)This large-cap value stock fund was started in 1988. Its average-annual total return results (as of May 31) for five, 10 and 15 years are 5.35 percent, 10.94 percent and 10.55 percent, respectivelyToday, VEIPX's portfolio of 175 stocks is rated by Morningstar as having above average return and below average risk. This relatively conservative profile would be an appropriate choice for investors seeking to build and/or maintain a core retirement investing holding.Typical of Vanguard offerings, this fund carries a low expense ratio of 0.32 percent and a low portfolio turnover percentage of 36 percent.Morningstar analyst, Sonya Morris, likes VEIPX because its "focus on dividend payers [portfolio selections] has limited the fund's downside and tempered volatility. And over the long haul, the fund has delivered competitive returns while avoiding much of the market's wrath."TCW Galileo Dividend Focused (TGIGX)Over the years, the TGIGX fund has moved from the mid-cap value stock fund category to the large-cap variety. Morningstar rates the fund as having a high return and below average risk profile. Its expense ratio of 1.33 percent is a bit on the high side by my standards, but it has delivered average-annual total returns (as May 31) between 11.5 and 12.5 percent for the past 5-10-15-year periods. And, recent portfolio turnover has been in a reasonable 30 percent to 40 percent range.Morningstar's "Take," written Feb. 15 by analyst Terence Geenty, said fund manager, Diane Jaffee, is "headed in the right direction" - i.e., lowering expenses as the fund increases its asset base. TGIGX's net assets increased from $185 million in 2004, (small by mutual fund standards) to $557 million as of May. iShares Dow Jones Select Dividend Index (DVY)DVY is an exchange-traded fund, commonly referred to as an ETF, that is listed as a stock on the New York Stock Exchange. This ETF offering comes from Barclays Global Investors, the world's largest and most experienced manager of index-tracking portfolios. The fund seeks investment results that correspond generally to the price and yield performance of the Dow Jones Select Dividend Index. DVY has been operating since November 2003. Its 2004 total return was 17.9 percent.The DVY fund has a low expense ratio of 0.4 percent and a typically low index-fund turnover ratio of 2 percent for the 100 holdings in the portfolio. As yet, Morningstar has no rating on this fund.Dividend-paying stocks offer a tangible cash return and a margin of safety to investors. Dividend-focused mutual funds take these investment qualities one step further by offering a broad diversification among several holdings in one investment.The Investing Wisely column is written by Richard Loth, managing principal of Mentor Investing and an independent registered investment adviser. Loth can be reached at 827-5591 or mentorinvesting@comcast.net.Vail, Colorado


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The VailDaily Updated Jun 15, 2005 01:48PM Published Jun 14, 2005 12:00AM Copyright 2005 The VailDaily. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.