As debt woes in Europe roil U.S. markets, more investors are turning to dividend-paying stocks for stability, says Daniel Peris, manager of the Federated Strategic Value Fund.
The $991-million fund's biggest positions were Bristol-Myers Squibb , Royal Dutch Shell , BP and AT&T as of March 31. Those stocks have dividend yields of at least 5.7 per cent, doubling the 2 per cent average for the S&P 500 Index. The fund, which has earned three stars from Morningstar, has returned 15 per cent during the past year. The fund has lost 0.6 per cent annually during the past five years, beating half of its peers.
Welcome to TheStreet's Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.
Why will total returns become popular with investors again?
Daniel Peris: Total return is dominated by the dividend, both the dividend yield and dividend growth over time and that's how we manage this portfolio. After a 25-year period in which investors have really been moving away from dividends with interest rates and the rate of the risk-free alternative coming down, dividends really faded into the background. Well, we've reached rock bottom. Interest rates are at zero and the return from many near-term investments is close to zero.
Was the move away from dividends exacerbated by the tech boom?
Daniel Peris: Absolutely. We've hit maturation in a number of sectors where it's time to realize that the risks of reinvestment are higher than simply returning cash to shareholders, primarily the dividend. Along with the decline in interest rates, I think the tech boom was certainly a part of it. It was also a big shift in our society. We had a big pendulum swing in favor of open markets and deregulation. We had a lot of investors, and not just the wealthy, enter into the stock market for the first time due to 401(k) changes and technological advances like electronic trading on the web. This propelled a lot of people into the stock market and led to a lot of trading, a lot of speculation.
How do you know when a dividend is safe?
Daniel Peris: We try to answer the following question as best we can: "What is the ability and inclination of management to pay and increase the dividend over the next three to five years?" That involves the analysis of the business, items like their capital needs and where they are in their particular business cycle. And we really study a company's management as to their capital allocation priorities.
What sectors are you finding pay the healthiest payouts right now?
Daniel Peris: If you look at the S&P 500, it only has a 3 per cent weight in the telecom sector. If you look at the aggregate dividend opportunity from those same 500 companies, about 9 per cent of the dividends come from the telecom sector. So we go where the dividends are. We go to securities and businesses where the cash is. Telecoms and consumer staples are our two largest sectors across our portfolios.
How do you know when a dividend-paying company has lost its way?
Daniel Peris: The yield itself communicates a tremendous amount of information. A security with a 1 per cent or 2 per cent yield basically is communicating today that investors view it as a growth vehicle. The cash returns from that investment are miniscule. It's just not worth it. We shy away from low-yielding sectors because the risks are perceived to be great and the cash returns are low. At the other extreme, we don't like excessively high yields unless we feel very certain that the company can fund that dividend. We let the market in many ways do our heavy lifting when we make that decision.
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