(This is the second in a series of dividend stocks in today's low-interest environment based on interviews with professional investors. The first piece included a custom screen with 25 dividend shares by John Buckingham, editor of The Prudent Speculator.)
For investors who have been hungry for income, today's low interest rates have erased many options from the menu.
That's where Federated Investors & # 39; Daniel Peris comes in.
Peris, Federated Strategic Value Dividend Team leader, takes a different approach and focuses on providing a growing revenue stream to shareholders in three mutual funds he co-manages.
These include the $ 9.5 billion Federated Strategic Value Dividend Fund
SVALX, -160% ,
the Federated International Strategic Value Dividend Fund, $ 423 million
and the Federated Global Strategic Value Dividend Fund
GVDLX, -1.39% ,
which is much smaller, with $ 1.6 million in total assets and was established in January 2017. Including private and institutional accounts and advisory relationships, the team manages around $ 30 billion.
Federated Strategic Value Dividend Fund is focused on the US market, with the Dow Jones US Select Dividend Index
DJDVP, + 0.80%
as a yardstick. The Federated International Strategic Value Dividend Fund is comprised of non-US equities, and the benchmark portfolio is MSCI World ex-U.S. High yield index. The Federated Global Strategic Value Dividend Fund includes, as the name implies, US and non-US stocks; The reference is the MSCI World High Dividend Yield Index.
Focus on income
Peris said that the main goal of the federated strategic value dividend fund is to provide shareholders with a monthly income stream while aiming for long-term capital growth. An important objective of the fund is to increase the portfolio return (before fees) by 4% to 5% per annum, and Peris expects stock price valuation to match dividend appreciation.
30-day SEC return for the fund's R6 shares (the stock class with the lowest annual expense ratio of 0.79%) is 4.17%, but Peris said the 30-day return, looking back, "is almost impossible to experience . "
It may be more reasonable to look at the fund's weighted average dividend yield of 4.67% in the second quarter. The fund distributes all the proceeds, so it is not as simple as deducting 0.79% in annual expenses from the portfolio dividend. The expenses come from the fund's total assets. If we were to subtract the annual rate of expenditure from the portfolio yield in the second quarter, we would have a return of 3.88%. There is an attractive return in this environment, given the return on 10-year US Treasuries
TMUBMUSD10Y, + 0.11%
is 1.53% and the return on 30-year government bonds
TMUBMUSD30Y, + 0.53%
is 2.02%. (The weighted total return for the S&P 500 is 2.05%, according to FactSet.)
For the R shares, the dividend distributed during 2018 amounted to 27 cents per share. If we share this with the closing price of $ 6.15 on December 29, 2017, we have a dividend yield of 4.39% for 2018.
Looking further back, annual dividend distributions for the Federated Strategy Value Dividend Fund's increased Class R shares 8% in 2018, after increasing 9% in 2017. The R shares were launched in June 2016.
It is important to look at the annual dividends, because they include special dividends that can vary greatly depending on company, industry and even the entire market from year to year. The Fund's institutional shares
has a longer track record (and a current annual expense ratio of 0.81%). Here are annual dividend distributions per share over the last five years, according to FactSet:
|Year||Dividend per share||Increase from the previous year|
|2018||$ 0.27||8%  2017||$ 0.25||9%|
|2014||$ 0 , 24||0%|
Peris said he and his team are looking for companies with "a clear path to dividend growth" and are trying to avoid companies that may be likely to cut the dividend payout.  Many executives will look for companies with dividend ratios of free cash flow that are not very high, to be comfortable with room to increase dividends. But Peris said companies with high payout ratios are usually attractive to him because "they have less money available for buybacks."
While he was careful to emphasize that he did not want to "starve" companies with the cash they need to reinvest in their businesses, Peris said, "once they have made all their relative investments, we tend to ask for the rest. "
"The US stock market is set up quite differently, with free money being spent on repurchases," he said.
When asked how he decides when to sell a stock, Peris said: "Over the last 10 years, the vast majority of exits have been companies that have had a price rise well ahead of the dividend increase rate."
Here are the top 10 holdings (of 41) of the Federated Strategic Value Dividend Fund as of July 31:
|Company||Ticker||Dividend yield||Total return – 2019 to and with August. 23||Share of Fund|
T, + 0.32%
|Philip Morris International Inc.||
|Dominion Energy Inc.||
D, + 1.16%
ABBV, + 0.74%
|BP PLC ADR||
BP, + 0.25%
|Exxon Mobil Corp.||
XOM, + 0.53%
KO, + 1.49%
|Verizon Communications Inc.||
VZ, + 1.41%
SO, + 1.14%
|Duke Energy Corp.||
DUK, + 0.67%
|Sources: Federated Investors, FactSet|
Here are the top 10 shares (out of 43) of the Federated International Strategic Value Dividend Fund 31 July:
|Company||Ticker||Dividend Dividend||Total Return – 2019 to August 23||Share of Fund|
BCE, + 0.32 %
|National Grid PLC||
NG, + 0.61%
ENB, + 0.86%
SAN, + 0.29%
|Zurich Insurance Group Ltd.||
ZURN, + 0.26%
|Canadian Imperial Bank of Commerce||
CM, + 0.82%
|TC Energy Corp.||
TRP, + 0.48%
FP, + 0.60%
|Sources: Federated Investors, FactSet|
Income and return cost
Instead of pointing out that a focus on total return may be best for long-term investors seeking growth, we have looked at the revenue – and increasing revenue – in this article. Peris said it was "super important" for investors to understand return-on-price. If you buy shares in a company that later raises the dividend, today's return may not increase if the shares have risen, but your return, based on what you paid for your shares , will increase. The same will be the case for a mutual fund that increases the dividend distribution.
An excellent example of how patience can pay off is provided by Southern Co.
SO, + 1.14% ,
the ninth largest stake in the Federated Strategic Value Dividend Fund.
If you had purchased shares in Southern on August 22, 2014, you would have paid $ 43.68 per share. The quarterly dividend at that time was $ 0.525 per share, at a return of 4.81%. The stock price August 23, 2019 was $ 57.68. The current quarterly dividend payout ratio for Southern is NOK 62 per share. So today's return has fallen to 4.30%. If you did not reinvest the dividend, the return-on-price would increase to 5.68%. There is an attractive return in this environment, and in this case you would also have a capital appreciation of 32% over the five years.
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