Top Stock Holdings Of Best Performing Equity Income Mutual Funds
Dec. 5, 2011 5:02 PM
Here is a “pretty good” narrowed down list for fairly conservative do-it-yourself dividend income investors to research further. It starts with what top performing active fund management teams are doing, which gives you the advantage of the work of dozens of top professionals working over thousands of hours. That makes it a “pretty good” place to start looking for ideas.
To get to this list, we identified the 12 top long-term performance equity income mutual funds and then found those 45 stocks held most in common between those funds. We then cross-referenced that list of 45 with the Russell 1000 Growth at a Reasonable Price index (proxy GRPC) and the Russell Equity Income index (proxy EQIN), and also with the holdings of several dividend income ETFs.
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Here is how we identified the top equity income mutual funds. Among those several hundred mutual funds that describe their investment objective as “equity income,” we picked those that were in the top half by total return for each of 10 years, 5 years, 3 years and 1 year. That reduced the list to 12 funds.
We then found the 45 stocks most widely held between them. That’s the list in the table above.
We then cross-referenced the list with two Russell 1000 sub-indexes: One for Growth at a Reasonable Price (because we think that’s a good way to invest), and one for Equity Income (because Russell says they use a rules-based method to construct a “pure equity income” list).
We also cross-referenced the list with the holdings of several dividend income ETFs: SDY (S P 500 Dividend Aristocrats), DVY (Dow Jones Select Dividend), VYM (FTSE High Dividend Yield), VIG (Vanguard/Mergent Dividend Achievers Select), HDV (Morningstar Yield Focus), FVD (Value Line Dividend), FDL (Morningstar Dividend Leaders).
You will notice that there are some stocks in equity income funds that do not pay dividends, such as Google (NASDAQ:GOOG ). That is strange at first, but the term equity income is not a precise one and includes funds that might better be split into two groups: “Income with growth” and “growth with income,” where the first term is the dominant or controlling term. As a result of that nomenclature imprecision, until you look deeply, it is best to assume that most equity income funds are a blend of the two types. The Russell 1000 equity income sub-index used in this article is of the “growth with income” variety. The dividend ETFs also have a diverse set of rules and may be more or less to one side or the other of the “growth with income” or “income with growth” spectrum.
The 20 highest yielding of those 45 stocks are: AT T (NYSE:T ), Verizon (NYSE:VZ ), Mattel (NASDAQ:MAT ), Eli Lilly (NYSE:LLY ), Royal Dutch Shell (NYSE:RDS.A ), Total (NYSE:TOT ), Paychex (NASDAQ:PAYX ), Merck (NYSE:MRK ), Waste Management (NYSE:WM ), Bristol-Myers Squibb (NYSE:BMY ), Pfizer (NYSE:PFE ), Microchip Technology (NASDAQ:MCHP ), Kimberly-Clark (NYSE:KMB ), ConocoPhillips (NYSE:COP ), Sysco (NYSE:SYY ), Philip Morris (NYSE:PM ), DuPont (NYSE:DD ), Johnson Johnson (NYSE:JNJ ), Abbott (NYSE:ABT ), Intel (NASDAQ:INTC ).
If you equal weight the 12 equity income funds, the trailing yield is 1.74%, but the expense ratio is 1.06%. Therefore, the gross yield is 2.80%. That is more than long-term Treasuries and it is likely to grow. The highest yielding companies in the list yield from about 3% to 6%.
Investors who purchase the individual stocks can generate substantially more yield than by owning the funds, but it takes work.
This list should provide some good background perspective for the do-it-yourself dividend income investor.
For those who might ask, it takes some special software to generate this cross-reference data, and would be an all consuming task that would take way too much time if attempted manually with paper and pencil.
This data is one of the collateral inputs to our “Rational Risk Equity Investor” monthly letter.
Note that just because active fund managers own a stock, doesn’t necessarily, make it a great choice – they make mistakes too, but on balance, this list comes from teams that won over time. And, of course, not all of the stocks they choose are suitable for your particular needs and purposes. Nonetheless, this list probably has something in it of potential interest to most investors.
Disclosure: QVM has long positions in several but not most of the stocks in the filtered list in this article as of the creation date of this article (December 3, 2011).
Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Do your own research or obtain suitable personal advice. You are responsible for your own investment decisions. This article is presented subject to our full disclaimer found on the QVM site available here .
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