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)
The worst offender I found is the Putnam Fund for Growth and Income (PGRWX). Investors have put more than $5.3B in a fund that Putnam claims has been “seeking growth and income from attractively valued, dividend-paying companies since 1957.” Yet the fund only has a TTM yield of 1.13%. This is almost half as less as the S&P 500. It seems the fund is more like a growth fund masquerading as a dividend fund.
T Rowe Price Dividend Growth (PRDGX)
Another fund popular with investors, to the tune of $4B, is the T Rowe Price Dividend Growth Fund. This fund sports a paltry 1.25% TTM yield. One of its largest holdings is Visa (V). While certainly a growth stock, its miniscule .71% dividend yield barely qualifies as a dividend stock.
Nuveen Santa Barbara Dividend Growth Fund (NSBAX)
Another dividend growth fund that’s more growth than dividend is the Nuveen Santa Barbara Dividend Growth Fund. With $2.4B in assets, this fund has only a 1.54% trailing yield. The fund has excellent returns but calling it a dividend growth fund is a stretch. “Equity” or “growth” fund would be better a term and would make the types of stocks the fund invests in clearer to investors. One of the largest holdings is Qualcomm (QCOM), with a dividend yield of 1.83%, which is below average for the S&P 500.
Oppenheimer Dividend Opportunity Fund (OSVAX)
Many of the funds I mentioned above consider themselves to be “dividend growth” funds, so I can see the argument that having below average dividend yields isn’t a big deal. (I think investors would be better served, however, if the funds made it clearer that dividends were only a tertiary portion of the fund strategy.)
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)
Investors have wisely stayed away from this apparently mislabeled fund. It has only $7.5M in assets. Despite being called a core dividend fund, the SEC yield (TTM yield was unavailable) was only 1.62%.
USAA Income Stock Fund (USISX)
This fund surprised me. Low costs are usually an indicator of a decent fund. Despite being called an income stock fund, it has a TTM yield of only 1.63%. Investors could earn more income with the $2.6B they’ve socked away in this fund if they just invested in an S&P 500 index fund.
T Rowe Price Equity Income (PRFDX)
This fund is the most puzzling to me. It’s an absolutely massive fund with $28.5B in assets. With a fund this big, it’s no surprise that it’s basically a closet index fund. The TTM yield is 1.67%, and the returns for the fund have pretty much matched the market over the long term. Once again, investors looking for income would be better served with an index fund.
Goldman Sachs US Equity Dividend and Premium Fund (GSPAX)
It wouldn’t be an article criticizing the financial industry if I didn’t pick on Goldman Sachs. This fund, despite selling calls to generate additional income, has managed to generate a TTM yield of only 1.8%. At least, it’s in spitting distance of the S&P 500. Yet Goldman somehow sees fit to charge investors 1.21% annually for delivering less income than an index fund.
American Century Equity Income (TWEIX)
While this American Century fund does generate more income than the S&P 500, 2.16% (SEC 30-day yield; TTM yield unavailable) to be exact, it made the list because the fund also invests a sizable chunk of its assets in convertible securities. We would expect a fund pursuing that strategy and calling itself an “equity income” fund to be able to distinguish itself a bit more
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)
Goldman Sachs international dividend fund offering makes the list as the worst offender. This fund charges investors 1.39% per year to deliver only 2.21% (TTM yield) in income. With $430M in the fund, at least the damage is limited.
Putnam Global Dividend (PGDEX)
The relatively unpopular (just $12M in assets) Putnam Global Dividend fund takes second place with an SEC 30-day yield (TTM yield unavailable) of 2.29%.
Allianz NFJ Global Dividend Value Fund (ANAUX)
The bronze medal finisher is an Allianz fund with a TTM yield of 2.52%. Although the fund is small with only $72.6M, I have encountered it in numerous portfolios I have reviewed.
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 firstname.lastname@example.org.
Disclosure: Long QCOM, V