Portfolio Manager Perspectives

Jeff Benjamin

Sweet spot for dividends? Don't ignore mid-caps

Cash-rich companies will keep paying dividends for several years, says AAM's Mike Boyle

Nov 15, 2010 @ 2:36 pm

By Jeff Benjamin

The outlook for dividend income is bright and could be strong for several years, according to Mike Boyle, a portfolio manager at Advisors Asset Management.

Mr. Boyle, who oversees $1.5 billion in unit investment trust assets, said the current phase of the market cycle sets up a steady run by dividend-paying stocks.

“The final stage of a bull market can be several years long,” he said.

The market's current phase began in September, following about nine months of the “grind phase,” when the market was flatter and more fearful of another economic downturn, Mr. Boyle said.

The first phase of the current bull market, which he described as the bounce phase, kicked off in March 2009 when risk assets went on a six-month tear.

The present drivers of the stock market include the latest round of quantitative easing, as well as huge cash stockpiles on corporate balance sheets that should lead to consolidation, stock buyback plans and dividend increases.

“Our thesis is that companies are flush with cash,” he said. “Even if bond yields weren't this low, we'd be talking about the benefits of dividends right now.”

But the fact that yields on most fixed-income products are hovering near historic lows bodes well for stocks that favor a dividend distribution policy, he said.

“We're only seeing the beginning of investors' turning to things that pay coupons, but are not bonds,” he said. “Over the next year, you will see a lot of fixed-income investors looking to dividend stocks for income.”

Even with his passion for dividend income, Mr. Boyle is quick to point out that it would be a mistake to look only in the large-cap arena for total return.

“When it comes to dividends, we're not just all large-cap stocks,” he said. “Mid-cap appears to be in the sweet spot right now, although I would still be 40% large cap.”

As a reminder of the benefits of a diversified-dividend strategy, Mr. Boyle added some clarity to the commonly cited negative performance of the S&P 500 over the past decade.

The index's total 10-year return through December 2009 was -9.1%, which adds up to an annualized loss of 0.9%.

But the mid-cap-oriented S&P 400 Index and the small-cap oriented S&P 600 Index each had total returns over the same period of 85.2%, with annualized returns over the period of 6.4%.

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

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