TIP SHEET: Federated Dividend Fund Plows Through Market Swings

19th Jul 2010 12:36

(This article was originally published Friday.) By Brian Baskin Of DOW JONES NEWSWIRES The Federated Strategic Value Dividend Fund (SVAAX) is happy to leave stock picking to the so-called experts. The fund invests in companies that distribute large, regular dividends, and aims to have returns pegged to those payments rather than short-term changes in share prices, said Daniel Peris, one of two portfolio managers. The strategy allows the fund's team of six analysts to focus on companies' long-term business strategies, rather than worrying whether other investors' unreasonable expectations for quarterly earnings will cause share prices to fluctuate, Pittsburgh-based Peris said. "We're in the cash-collection business," Peris said. "That does lead to low turnover. ... If we have companies paying dividends regularly and raising them regularly, we have the luxury of not having to trade stocks for a living." The fund has returned 17.5% in the past 12 months through Thursday, compared with about 20% for the Standard & Poor's 500, according to Morningstar Inc. However, Morningstar shows the fund returning -10.2% over the past three years through Thursday, while the S&P 500 has returned -8.9%. The fund had $985 million in assets at the end of June, with an expense ratio of 1.06% and a minimum investment of $1,500. Finding companies that will have enough money coming in to pay generous dividends over the long haul is the easy part, Peris said. Picking the firms with management that favors distributing cash to shareholders over expansion or acquisitions is trickier, he added. "Mature companies in mature sectors" such as utilities, food, tobacco and telecoms are typically reliable investments, Peris said. The fund's biggest holdings at the end of the second quarter included such majors as consumer products company Kimberly-Clark Corp. (KMB), utility Duke Energy Corp. (DUK) and BCE Inc. (BCE, BCE.T), which operates the Bell Canada telephone network. The fund also invests in several large pharmaceutical companies, a sector where Peris and his team must suss out which firms have management inclined toward dividends and which "say flat-out they won't raise dividends." "In pharmaceuticals it's a conversation; we not only listen to management and assess, we communicate why we are or might be a shareholder," Peris said. Bristol-Myers Squibb Co. (BMY) and GlaxoSmithKline PLC (GSK, GSK.LN) are both top holdings for the fund. Peris said a 25-year bull stock market sharply reduced the number of companies and investors keeping dividends front and center. But a struggling economy and a flattening-out of share prices is likely to bring his retro strategy back, as pursuing all-out growth at the expense of cash payments to shareholders becomes riskier, Peris said. The technology sector has matured to a point where dividends could be on the table at some of the most dominant companies, while retail titans that now dominate their markets have an opportunity to start sending more profits directly to shareholders, Peris said. Wal-Mart Stores Inc. (WMT) raised its dividend by 11% in March from 2009, the latest in a series of increases, while Home Depot Inc. (HD) increased its dividend in February for the first time since 2006. The fund did not own shares of Wal-Mart or Home Depot in the most recent full disclosure of its holdings May 28. Wal-Mart has increased its quarterly dividend from 23.75 cents a share in 2008 to 30.25 cents a share this year, raising it once in 2009 and once in 2010. Home Depot raised its quarterly dividend this year to 23.625 cents a share from 22.5 cents a share. By comparison, Kimberly-Clark's quarterly dividend is 66 cents a share. "It took 25 years to get away from dividends; it will take more than a year or two to get all those ... managers returning cash to company owners," Peris said. (Brian Baskin covers the oil market for Dow Jones Newswires. He can be reached at 212-416-2453 or at [email protected].) (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected]. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.) (END) Dow Jones Newswires July 19, 2010 07:36 ET (11:36 GMT)