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PAUL KATZEFF

Fund Soars By Focusing On Income Stocks, Shunning Sector Bets

If you want to know how to invest in stocks, check out mutual funds that succeeded during the past year. 2022 was the toughest calendar year since 2008, when the broad market in the form of the S&P 500 plunged 37%.

The benchmark tumbled 18.1% in calendar 2022. So far in 2023, the popular benchmark is still down 15.40% over the 12 months ended Monday.

But an elite minority — like the $118.9 million Parametric Dividend Income A Fund (EAPDX) — have shown they knew how to invest in stocks through the good and mostly bad of these past 12 months. Parametric Dividend Income has not only outperformed, it has posted an outright positive return.

How To Invest In Stocks

The fund is up 1.35% over the past 12 months vs. the S&P 500's plunge. The fund's midcap value rivals tracked by Morningstar Direct averaged a 6.23% loss.

How has Parametric Dividend Income done it? A key ingredient in the fund's recipe is its focus on dividend-paying stocks.

That's because consistent dividend payers tend to be financially strong. Many investors want precisely those stocks when a recession or other weak macro environment looms.

Diversification

Success in how to invest in stocks also depends on diversification, says co-manager Tom Seto. "We're not just trying to buy stocks with high yields," Seto said on Jan. 10. "Instead, we want a diversified pool of stocks that produces above-average yields as well as lower volatility."

The fund held 179 stocks as of Oct. 31, according to Morningstar Direct.

Another way Parametric Dividend Income seeks diversification is by avoiding sector concentration, Seto says. Instead, Seto and co-manager Jennifer Sireklove categorize potential buys into nine major sectors. They treat communication services and technology as a single, combined sector. In addition, they abstain from holding REITs.

Most REIT dividends are nonqualified, Seto says. That "means that the majority of their payouts are generally taxed at ordinary income rates rather than the lower long-term capital gains rate that applies to qualified dividends," he said.

Seto and Sireklove then equal-weight the remaining nine sectors. Each holds about 11% of the fund's assets.

The portfolio construction starts with the broad Russell 3000 index. Non-dividend payers are screened out. So are stocks whose market capitalization is smaller than $1 billion. Dividend and risk metrics are part of the screening process.

Seto and Sireklove reconstitute the portfolio once annually. "Our major reconstitution is in July, shortly after the Russell 3000 index reconstitutes," Seto said. The fund rebalances quarterly to keep sectors equal-weighted.

How To Invest In Stocks: Income

Income plays a key role in this fund's strategy for how to invest in stocks.

The fund's SEC yield is 2.51% vs. 1.69% for SPDR S&P 500 ETF, a proxy for the index itself.

As for volatility, over the past five years as of Dec. 31, the fund notched 90.23% of the S&P 500's gains during run-ups. During pullbacks, it limited losses to 94.80% of the market's.

Seto and Sireklove are with Parametric Portfolio Associates, which subadvises the fund for Morgan Stanley-owned Eaton Vance.

A Materials Leader

Since the fund avoids sector bets, stock picks make or break its returns.

Air Products & Chemicals, in the materials sector, illustrates the fund managers' savvy when it comes to how to invest in stocks.

The company offers industrial and specialty gases, chemicals and equipment to the metals, chemical and energy markets.

Shares are up 6.97% over the past 12 months.

The stock has a 2.1% dividend yield.

The company's average earnings-per-share growth over the past three quarters was 9.9%, according to IBD Stock Checkup. EPS is forecast to rise 7% this quarter.

The stock sports four years in a row of annual EPS growth. And EPS is seen climbing 9% this year.

The stock has an IBD Composite Rating of 95.

A Composite Rating of 90 means that a stock is in the top 10% of all stocks on a number of technical and fundamental factors, including both price performance and earnings. The best way to use the Composite Rating is to watch for stocks that have 90-plus scores and are forming bases or are in follow-on buy areas. That way, you spot the best-positioned stocks before they start big price runs. Look up a stock's Composite Rating at IBD Stock Checkup.

How To Invest In Stocks: AbbVie

AbbVie shows that the managers' skill at stock investing extends to the health care sector. The biotechnology firm develops pharmaceutical products to treat immunology, virology, oncology and other diseases.

The company's biggest sales generator is Humira. It's a treatment for arthritis, psoriasis and Crohn's disease.

AbbVie shares are up 24.31% over the past 12 months. The firm's dividend yield is 3.7%. Earnings per share rose 29% last quarter.

The company's average EPS growth over the past three quarters was 16.6%. Earnings per share are forecast to rise 10% this quarter.

The stock's annual EPS has grown four years in a row. And earnings per share are seen climbing 9% this year.

The stock has an IBD Composite Rating of 93.

Another Yield Stock

What's an example of how to invest in stocks in the financials sector? Travelers Cos. offers property and casualty insurance to businesses, government units and individuals.

Shares of the insurer are up 21.69% over the past 12 months.

Its dividend yield is 2%. Earnings per share fell 15% last quarter. The company's average earnings-per-share growth over the past three quarters was 4.6%. EPS is forecast to slide 23% this quarter.

The stock's annual earnings have grown four years in a row. But EPS is seen declining 7% this year.

The stock has an IBD Composite Rating of 85.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and strategies of the best mutual funds.

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