Equity Income Funds No Longer the Only Game in Town
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.
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.
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
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|
|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|
|OXY||Occidental Pete Corp||Energy||63,324|
|SXL||Sunoco Logistics Partners Lp||Energy||5,396|
|JPM||JPMorgan Chase & Co.||Financials||169,771|
|PNC||PNC Financial Services||Financials||31,489|
|TRV||Travelers Cos Inc||Financials||27,792|
|MMC||Marsh & Mclennan Cos Inc||Financials||19,337|
|MTB||M & T Bank Corp||Financials||12,932|
|WSH||Willis Group Holdings Plc||Financials||5,925|
|HBAN||Huntington Bancshares Inc||Financials||5,621|
|AXS||Axis Capital Holdings Ltd||Financials||4,338|
|CFR||Cullen Frost Bankers Inc||Financials||3,427|
|VR||Validus Holdings Ltd||Financials||3,212|
|STJ||St Jude Medical Inc||Healthcare||11,282|
|ETN||Eaton Corp Plc||Industrials||26,267|
|GD||General Dynamics Corp||Industrials||25,142|
|NSC||Norfolk Southern Corp||Industrials||20,002|
|NOC||Northrop Grumman Corporation||Industrials||16,732|
|WU||Western Union Company (The)||Industrials||8,209|
|LLL||L-3 Communication Holdings Inc||Industrials||7,294|
|HPQ||Hewlett Packard Co||Technology||29,261|
|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.