Total Return Approach to Dividend Stocks

Advisors face this problem every day: Fixed-income rates are low, but aging clients need to generate income. “People are looking for yield,” says Bob Zenouzi, lead manager of the Delaware Dividend Income Fund. Despite the name of his fund, Zenouzi prefers to offer his investors total return these days. He believes that it is the best way to approach the mismatch between current yields and investors’ income needs. Zenouzi contends that many traditional income bastions — including utilities, master limited partnerships, mortgage REITs and health care REITs — have become “bond surrogates” and are therefore too pricey in today’s market. “When you look at the highest quintile dividend yield, the P/Es of those companies are trading at a 20% premium to the S&P 500 P/E; and historically they traded at a 20% discount,” he says.

“We own some, but we’re just really underweight,” he explains. “So we’ve lowered the yield in our fund — which, frankly, hasn’t been too popular with many advisors and investors, but we think it’s the right thing to do.” Instead of focusing on the juiciest yields, Zenouzi’s team buys issues that it believes are likely to increase dividend payments. “To me the risk isn’t so much in buying good equities with competitive dividend yields that can grow; the risk is chasing the highest yields,” Zenouzi says. He sees danger in overvalued, high-yielding equities as interest rates inevitably rise. “When they get to these expensive levels, they become much more correlated to the 10-year Treasury,” he explains.

Source: Financial Planning

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