By Philip van Doorn, MarketWatch
(This is the second in a series about dividend stocks in today’s low interest-rate environment based on interviews with professional investors. Links to the other articles are below.)
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’ Daniel Peris comes in.
Peris, head of the Strategic Value Dividend Team at Federated, takes a different approach, focusing on providing an increasing income stream to shareholders of three mutual funds he co-manages.
Those include the $9.5 billion Federated Strategic Value Dividend Fund /zigman2/quotes/208499581/realtime SVALX +0.18% , the $423 million Federated International Strategic Value Dividend Fund /zigman2/quotes/209704007/realtime IVFLX +0.84% and the Federated Global Strategic Value Dividend Fund /zigman2/quotes/202385398/realtime GVDLX +0.18% , 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, Peris’ team manages about $30 billion.
The Federated Strategic Value Dividend Fund is focused on the U.S. market, with the Dow Jones U.S. Select Dividend Index /zigman2/quotes/210599128/realtime DJDVP -0.25% as a benchmark. The Federated International Strategic Value Dividend Fund is made up of non-U.S. stocks, and its benchmark is the MSCI World ex-U.S. High Dividend Yield Index. The Federated Global Strategic Value Dividend Fund, as its name implies, includes U.S. and non-U.S. stocks; its benchmark is the MSCI World High Dividend Yield Index. /zigman2/quotes/209704007/realtime IVFLX +0.84%
Focusing on income
Peris said the main objective of the Federated Strategic Value Dividend Fund is to provide shareholders a monthly income stream, while also aiming for capital growth over the long term. An important goal of the fund is to increase the portfolio yield (before fees) by 4% to 5% a year, and Peris expects share-price appreciation to match dividend appreciation.
The 30-day SEC yield for the fund’s R6 shares (the share class with the lowest annual expense ratio of 0.79%) is 4.17%, however, Peris said the 30-day yield, which looks backwards, “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 of its income, so it is not as simple as subtracting the 0.79% in annual expenses from the portfolio yield. The expenses come out of the fund’s total assets. If we were to subtract the annual expense ratio from the second-quarter portfolio yield, we would have a yield of 3.88%. That is an attractive yield in this environment, considering the yield on 10-year U.S. Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y -3.53% is 1.53% and the yield on 30-year Treasury bonds /zigman2/quotes/211347052/realtime BX:TMUBMUSD30Y -3.04% is 2.02%. (The weighted aggregate yield for the S&P 500 is 2.05%, according to FactSet.)
For the class R shares, dividends distributed during 2018 totaled $0.2273 a share, which was an increase of 23% from dividends of $0.1842 a share in 2016. The fund also distributes capital gains, which vary considerably from year to year.
Peris said he and his team look for companies with “a clear path to dividend growth,” and try to avoid companies that may be likely to cut their dividend payouts.
Many managers will look for companies with ratios of dividends to free cash flow that aren’t very high, to be comfortable that there is headroom to increase dividends. But Peris said companies with high payout ratios are typically attractive to him, because “they have less cash available for buybacks.”
While being careful to emphasize that he wasn’t looking to “starve” companies of cash they need to reinvest in their businesses, Peris said, “once they have made all their relative investments, we are inclined to ask for the rest.”