Income-seeking investors should not make the mistake of ignoring smaller companies, according to Paul Hogan, co-manager of the $175 million FAM Equity Income Fund Ticker:(FAMEX).
While it is common to associate dividend yields with the largest blue-chip stocks, Mr. Hogan points out that at this point in the market cycle, smaller dividend payers can provide the additional boost of faster capital appreciation.
“We're focusing on the kinds of companies that we don't have to pay too much for,” he said. “It's been fertile ground.”
Mr. Hogan manages the 16-year-old fund along with Tom Putnam at Fenimore Asset Management Inc., which has $1.8 billion under management.
Part of the bottom-up research process considers a company's five-year compound rate of increasing dividends.
This has helped the fund produce a 12% five-year compound dividend growth rate. That compares with a -3% rate by the S&P 500 over the same period. Mr. Hogan generally invests in companies with a market capitalization of between $400 million and $20 billion, as long as they are paying a dividend.
Examples of the kinds of companies he is finding in the space include Microchip Technology Inc. Ticker:(MCHP) and Ross Stores Inc. Ticker:(ROST).
Microchip Technology is a $7.3 billion company with a 3.6% dividend yield.
Ross Stores is an $11.7 billion company with a 1.1% dividend yield. Ross also recently announced it will be increasing its quarterly dividend payout by 27% to 14 cents a share for shareholders of record Feb. 27.
The two companies are examples of what Mr. Hogan believes investors are missing by not focusing on smaller companies for dividend income.
Despite the general perception that larger companies are the best place to find dividends, he pointed out that 29 of the S&P 500 companies pay a yield of at least 2%, compared with 841 companies in the Russell 3000 Index.
Last year, the fund gained 6.8%, which compares with a 2.1% gain by the S&P 500 and a 3.8% decline by the mid-cap category as tracked by Morningstar Inc.
The 40-stock portfolio also has a 15% annual turnover rate, which has enabled the managers to avoid passing along a realized capital gain to shareholders for the past four years.
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