Equity Income Funds No Longer the Only Game in Town

February 20th, 2013 by

Investors may have taken their foot off the gas pedal when it comes to equity income fund flows and many of the dividend-paying stocks they hold, but they certainly have not applied the brakes just yet.

 

The latest data as a February 14, 2013 from Lipper shows a weekly outflow of $156 million, keeping the first two weeks of February slightly positive at a net of $48 million.   But February has been a weaker month than January the past two years, seen in the table below, as many investors change and/or add to their fund allocations on a quarterly or annual basis.

20130219 Equity Quarterly

 

According to Matthew Lemieux, Sr. Research Analyst at Thomson Reuters Lipper, investors still seem comfortable with finding yield in equity.  On a monthly basis since July 2010, Equity Income has seen 31 out of 32 consecutive periods of positive inflows Fund flows stand at $2.57 billion since the beginning of 2013.  If flows continue at the same rate, the first quarter should come in at around $5.15 billion.

 

The sole negative month for equity income fund flows was December 2013, amid the uncertainty of 2013 dividend tax rates spooked many dividend investors, presumably with taxable dividend exposure, out of dividend-paying equity income funds.  Likewise, Lemieux mentions the lower rate of funds coming into equity income so far this year as possibly some of the remaining impact of the changes in dividend and capital gains starting in 2013.  Lemieux also sees a stronger acceptance of a broader equity market, to the point that equity income is no longer the only (domestic) equity strategy in town.  Lipper data shows is beginning to show that core equity in the form of mid cap, small cap and multi cap receiving some interest where there hadn’t been much in the past.

 

Seen on a quarterly basis in the table below, Lipper equity income fund flow data show the impact of tax uncertainty showing up in the fourth quarter of 2011, with a slight quarterly withdrawal level of $120 million.  Adding up the data shows 2010 was a strong year, with $30.9 billion of inflows.  Perhaps without the uncertainty associated with the so-called U.S. ‘fiscal cliff’ one would have seen more of a commitment to equities across the board.

20130219 Equity Monthly

 

According to Lipper Director of Research Tom Roseen, the performance of the larger funds in the past one-year and three-year periods has been in general lower than that of their respective benchmarks, most typically the S&P 500, the Russell 1000 or Russell 1000 Value indices.  That seems to matter less to investors, who seem more focused in many cases on replacing the yield they’ve historically received through fixed income products.

 

Dividend Stock Performance Update

 20130219 Div Chart

 

The chart above shows the total return performance (price change with dividends reinvested) of the S&P 500 (SPY.N) in the blue line, up 11.4% since March 22, 2012 when we published our 2012 Thomson Reuters Dividends List (more on the characteristics of the stocks on the list is below).   The Vanguard Dividend Appreciation Fund (VIG.N) in green is up 12.8% and the static TR Dividends List is up 13.9%.

 

Dividend stocks continue to be slightly favored in 2013 through February 15, with the TR Dividends up 7.7%, while the Vanguard VIG is up 7.3%, followed by the S&P 500 up 6.8%.

 

Thomson Reuters Fundamental Research produces a list of dividend paying stocks that contain several potentially attractive investment characteristics:

  • Liquidity – 200,000 shares/day or more trading volume
  • Higher than average S&P 500 dividend yields, though not the highest yields
  • Lower (higher) than average dividend payout (retention) rates – companies with higher than average yields and also lower than average dividend payouts (50% or less) are able to use retained earnings to grow internally and with less dependence on additional external debt or equity financing
  • Earnings Quality threshold – ensure the majority of past earnings are sustainable into the future (eliminates any names with StarMine Earnings Quality scores from 1-20 out of 100 as a filter)
  • Account for Credit Risk – use StarMine SmartRatios Credit Risk model scores (eliminates any names with scores of 1-10 out of 100 as a filter)

 

The resulting list includes the following 59 dividend-paying, higher than average yield and lower than average  stock symbols alphabetically:    ADM, AFL, ALV, APD, AXS, BBT, BKU, BLK, CA, CCL, CFR, COP, CPB, CSX, CVX, DPS, ETN, FCX, GCI, GD, GES, GIS, GNTX, GPC, HBAN, HLF, HPQ, HUN, INTC, JPM, KLAC, KRO, KSS, LLL, MAT, MMC, MMM, MSFT, MTB, NEE, NOC, NSC, OXU, PFE, PNC, PRE, RTN, SLM, SPLS, STJ, STX, SWY, SXL, TAP, TRV, VR, WAG, WSH, WU.

 

 

Ticker Company Name TRBC Economic Sector Market Cap (MM $US)
FCX Freeport Mcmoran Copper & Gold-A Basic Materials              33,388
APD Air Products & Chemicals Basic Materials              17,922
HUN Huntsman Corp Basic Materials                 3,889
KRO Kronos Worldwide Inc Basic Materials                 2,325
CCL Carnival Corporation Consumer Cyclicals              29,409
MAT Mattel Inc Consumer Cyclicals              12,627
GPC Genuine Parts Co Consumer Cyclicals              10,107
KSS Kohl’s Corp Consumer Cyclicals                 9,709
SPLS Staples Inc Consumer Cyclicals                 7,736
ALV Autoliv Consumer Cyclicals                 6,554
GCI Gannett Inc Del Consumer Cyclicals                 4,249
GNTX Gentex Corp Consumer Cyclicals                 2,734
GES Guess ? Consumer Cyclicals                 2,119
WAG Walgreen Co Consumer Non-Cyclicals              35,971
GIS General Mills Inc Consumer Non-Cyclicals              26,717
ADM Archer Daniels Midland Co Consumer Non-Cyclicals              18,881
CPB Campbell Soup Company Consumer Non-Cyclicals              11,294
DPS Dr Pepper Snapple Group Inc Consumer Non-Cyclicals                 9,490
TAP Molson Coors Brewing Co Consumer Non-Cyclicals                 6,923
SWY Safeway Inc Consumer Non-Cyclicals                 4,397
HLF Herbalife Ltd Consumer Non-Cyclicals                 3,478
CVX Chevron Corp Energy            216,053
COP ConocoPhillips Energy              71,875
OXY Occidental Pete Corp Energy              63,324
SXL Sunoco Logistics Partners Lp Energy                 5,396
JPM JPMorgan Chase & Co. Financials            169,771
BLK Blackrock Inc Financials              36,072
PNC PNC Financial Services Financials              31,489
TRV Travelers Cos Inc Financials              27,792
AFL AFLAC Incorporated Financials              25,354
BBT BB&T Corporation Financials              21,038
MMC Marsh & Mclennan Cos Inc Financials              19,337
MTB M & T Bank Corp Financials              12,932
SLM SLM Corp Financials                 8,042
WSH Willis Group Holdings Plc Financials                 5,925
HBAN Huntington Bancshares Inc Financials                 5,621
PRE Partnerre Ltd Financials                 4,989
AXS Axis Capital Holdings Ltd Financials                 4,338
CFR Cullen Frost Bankers Inc Financials                 3,427
VR Validus Holdings Ltd Financials                 3,212
BKU Bankunited Inc Financials                 2,351
PFE Pfizer Inc Healthcare            190,764
STJ St Jude Medical Inc Healthcare              11,282
MMM 3M Co Industrials              66,426
ETN Eaton Corp Plc Industrials              26,267
GD General Dynamics Corp Industrials              25,142
CSX CSX Corporation Industrials              20,803
NSC Norfolk Southern Corp Industrials              20,002
RTN Raytheon Co Industrials              19,337
NOC Northrop Grumman Corporation Industrials              16,732
WU Western Union Company (The) Industrials                 8,209
LLL L-3 Communication Holdings Inc Industrials                 7,294
MSFT Microsoft Corp Technology            232,463
INTC Intel Corporation Technology            106,387
HPQ Hewlett Packard Co Technology              29,261
STX Seagate Technology Technology              12,061
CA Ca Inc Technology              10,444
KLAC KLA-Tencor Corporation Technology                 8,254
NEE Nextera Energy Inc Utilities              29,844

 

 

In a world that continues to thirst for yield, looking in the right places in equities makes all the difference.