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Ideas for Income Investors. High Dividend Stocks, Mutual Funds etc.
Dumb Investment of the Week: Dividend Funds That Aren’t
Posted by: Ben Strubel (IP Logged)
Date: February 17, 2014 09:52AM
PGRStrubel Investment Management’s Dumb Investment of the Week for this week is dividend and equity income mutual funds that don’t actually invest in high dividend yield stocks.
With interest rates low and the Federal Reserve continuing to signal they will stay that way for the foreseeable future, dividend funds have risen in popularity. While there are some excellent dividend funds out there, a lot of funds that claim to be dividend funds aren’t. They have dividend yields below that of the S&P 500! In fact, over the last year or two in working with prospective clients who have conservative investment goals, I have come across many portfolios that aren’t filled with the conservative equity income funds that prospects thought they had.
Investors should not judge a fund only by its name or by what claims the marketing materials make for the fund’s focus. You’ll find that a careful reading of the SAI (Statement of Additional Information) for most funds shows that the fund can invest in almost any type of security if the portfolio manager wishes.
At the time of this writing, February 12, 2014, you could invest in the SPDR S&P 500 ETF Trust (SPY) with a trailing twelve-month yield of 1.84% or for global stocks in the iShares MSCI EAFE Index Fund ETF (EFA), which had a trailing twelve-month yield of 2.58%. One would expect that if you were investing in a dividend or equity income focused mutual fund, then the fund would have a yield above that of the comparable index. Otherwise, what is the point of the fund? You might as well just invest in the index, since you would get higher income.
Let’s take a look at some dividend funds that aren’t what they claim to be. All the data below was the current data reported by each mutual fund as of February 12, 2014. I also used the trailing twelve-month yield where possible as opposed to the SEC 30-day yield, since the trailing twelve-month yield would capture all dividend payments the fund received for the past twelve months rather than just 30 days. Considering most domestic companies pay quarterly dividends and many international companies make only two dividend payments per year (an interim half year payment and a final year end payment), the 30-day SEC yield may not capture all dividends.
The Worst Domestic Offenders
Putnam Fund for Growth & Income (PGRWX)
T Rowe Price Dividend Growth (PRDGX)
Nuveen Santa Barbara Dividend Growth Fund (NSBAX)
Oppenheimer Dividend Opportunity Fund (OSVAX)
The Oppenheimer Dividend Opportunity Fund, on the other hand, says the fund “typically invests in dividend paying stocks.” I don’t think it’s unreasonable that investors would expect above average dividends from the fund. Instead, they are getting a yield of just 1.58%.
The portfolio managers also seem to have a hard time figuring out what dividend stocks they want to own, evidenced by a 140% turnover ratio. For access to this crack team of managers, investors are paying 1.35% in annual expenses in addition to possible up-front sales charges.
It’s no surprise that this fund is rather small by mutual fund standards with only $200M in assets.
Nuveen Core Dividend (NCDAX)
USAA Income Stock Fund (USISX)
T Rowe Price Equity Income (PRFDX)
Goldman Sachs US Equity Dividend and Premium Fund (GSPAX)
American Century Equity Income (TWEIX)
The Worst International Offenders
Mislabeled dividend funds aren’t just limited to US securities. Many so-called international or global dividend funds fall short as well. Remember, we are looking at funds that generate less income than a comparable international index fund, such as the iShares MSCI EAFE Index Fund ETF (EFA), which had a TTM yield of 2.58%.
Goldman Sachs International Equity Dividend and Premium Fund (GIDAX)
Putnam Global Dividend (PGDEX)
Allianz NFJ Global Dividend Value Fund (ANAUX)
If you know of a dumb investment that you think would be a good topic for a future article or have an investment you’d like me to investigate, send me an email at[email protected].
Disclosure: Long QCOM, V
Stocks Discussed: QCOM, V, PGRWX, PRDGX, NABAX, OSVAX, NCDAX, USISX, PRFDX, G,