It was with great consternation that I managed this morning’s Barron’s cover story on the “Top 25 Dividend Funds” this morning.
Quite the SEO-friendly title, this sort of story is exactly the kind that hits the cover right when everyone’s already in. Indeed, we learn in paragraph two that “Assets in equity-income funds have more than doubled since the end of 2008, from $99.6 billion to $222.8 billion through September of this year…” Contrast that with the fund flows elsewhere around the equity universe…fugghedaboutit.
I’m not going to quote from the story here (mainly because the managers mentioned don’t seem to have all that much to say that you haven’t already read), but I will give you a quick impression:
1. Most of the funds selected are barely yielding more than the S%P 500’s dividend, which is like 2.1%
2. Almost all of them are charging too much for what is essentially a quasi-income strategy. I don’t much upside for these funds relative to the market outside of yield due to how overvalued their universe has become. US telecom stocks and utility stocks – staples of most equity dividend funds – are trading at 79% and 30% premiums to their historic relative valuations right now, for example. And so if you have limited capital gains potential and a low yield, what the hell are you wasting your time for?
3.We’re now hearing about the chase for non-traditional equity yield, which has quite a few parallels to other “chases” in the recent past, most notably the one underway in the bond market or last decade’s mortgage orgy. The managers in this story are talking about beefing up mid-cap dividends and one fund is loaded to the hilt with European dividend stocks. And then there’s talk of so-called “temporarily distressed equity dividend plays” – OMG. It’s not that these are all bad ideas or can’t work, it’s just that I know what comes next; anyone pumped for the first ever micro-cap dividend fund?
4. Bottom line, with few exceptions, I prefer the fundamentally-weighted index ETF approach over the active manager for this space. And while I’ve been talking about dividend stocks for two years + at this point, we started to trim in the middle of last week. This article made me want to trim even more, deep in my gut.