(By
Christine Benz) "More money has been lost chasing yield than at the point of a gun."
Perhaps that quote, attributed to financial market historian Ray
DeVoe, is a wee bit dramatic. But the central idea of not chasing income
at the expense of total return is well worth bearing in mind,
particularly as investors have to look far and wide to find stocks or
bonds that yield even 3% or 4% right now. If you see a stock, bond, or
fund with a yield much above that level, it's wise to stop and consider
what kind of risks may lurk inside.
Morningstar's dividend guru Josh Peters strongly favors those
companies that balance a robust current dividend with the ability
to increase that dividend over time. He notes that dividends represented
a bit less than half of the S&P 500's total return from 1911-2000
but also says, "If you don't have dividend growth, you don't have a
prime driver of capital gains or your hedge against inflation."
With an eye toward identifying mutual funds that focus on dividend
payers with long-term profitability and dividend-growth potential, I
turned to our Premium Fund Screener.
Because most dividend-focused stock funds play in the large-cap blend
or value arenas, I began by focusing on those two categories. Within
that subset, I screened for funds with dividend yields of 2.00% or
better--a perfectly reasonable hurdle given that the S&P 500
currently has a dividend yield in the neighborhood of 2.25%. Homing in
on whether a fund prioritizes dividend growth is a bit trickier using
the screening features in the tool, but I settled on funds with a large
share of wide- or moderately wide-moat stocks as a proxy. Our equity
analysts use the term moat
to convey whether a company has sustainable competitive advantages
relative to its competitors; generally speaking, we think firms with
wide moats should have higher long-term profitability and growth
potential than those that do not.
I then layered on a few basic quality and availability screens,
seeking funds with below-average expense ratios and seasoned managers
that are available to retail investors (those with less than $10,000 to
invest).
The ensuing list featured a number of sturdy core offerings that have
done a good job of balancing dividends with quality factors; Premium
users can click to view the complete list or adjust the screen to suit their own criteria.