Many of the most successful mutual fund managers in this volatile market have something in common. They target stocks they deem capable of consistently paying and raising dividends. John Sheehy, manager of $5.5 billion Fidelity Equity Dividend Income Fund (FEQTX), is one of those.
Sheehy's portfolio is among the minority of U.S. stock funds that have outperformed the market this year.
Going into Wednesday, Equity Dividend Income was down 3.65% for the year. That's much smaller than the S&P 500's 17.03% setback. The fund's large-cap value rivals tracked by Morningstar Direct averaged a 9.17% loss.
Gains from dividends have ben a key to its outperformance. Historically, that's a source of return that has held up when share prices have faltered. "If you look at shareholder returns in the S&P 500 since 1930, 40% was from dividends," Sheehy said. "That's a pretty attractive portion of return just from dividends."
Volatile Market Medicine
Equity Dividend Income Fund's 12-month trailing dividend yield was 2.11% as of June 30. Stablemate $339.9 billion Fidelity 500 Index (FXAIX), which tracks the big-cap bogey, had a yield of 1.57%.
Equity Dividend Income Fund achieves its stability plus income with a portfolio that includes names IBD readers understand. Twenty-three holdings held IBD Composite Ratings of 90 or higher as of Wednesday. Three holdings were members of the IBD 50. One of those was also on the IBD Leaderboard.
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. Especially in a volatile market, watch for stocks that have 90-plus Composite Ratings 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.
Traits Of Leading Holdings
Twenty-eight holdings have IBD SMR Ratings (which measure Sales, profit Margins and Return on equity) of A. IBD's SMR Rating scale runs A through E. An A score ranks in the top 20% of all stocks based on those gauges.
The IBD 50 is IBD's flagship screen of leading growth stocks that show strong relative price strength and top-notch fundamentals.
Leaderboard is IBD's curated list of leading stocks that stand out for their technical and fundamental prospects.
Stable Health Care Holding
Health care holding UnitedHealth Group is a member of the IBD 50 and Leaderboard. Its Composite Rating is 95. It has a B SMR Rating.
Its dividend yield is 1.2%.
How does UnitedHealth help this fund offset a volatile market? The company has limited economic sensitivity, Sheehy says. Revenue and earnings do not fluctuate much, he adds.
The company is also largely protected from inflation by multiyear deals with service providers, which lock in UnitedHealth's costs. "And they can also increase their premiums on kind of an annual basis," Sheehy said.
Sheehy also likes the company's underlying large cash flow, strong balance sheet and strong return on capital "that allows them to grow their dividend," Sheehy said.
Each of those factors makes the stock attractive to investors who are wary of a volatile market.
Payments Protect Against Volatile Markets
Booz Allen Hamilton has a 1.8% dividend yield. The company provides IT services for the Department of Defense and several civil agencies in the U.S. government.
The price of BAH stock pulled back in the first two months of this year. That's when Sheehy began to buy shares.
"There was some fear around Covid," Sheehy said. "It had caused some issues around the availability of their labor. Their growth slowed somewhat. The market got overly focused on that. But that issue has largely resolved itself."
Booz Allen Hamilton's strengths help protect it from a volatile environment, Sheehy says. Its growth has outpaced its consulting industry for much of the past decade. And the company has a diversified portfolio of contracts, so it's not reliant on any one customer to drive earnings growth.
Also, Booz Allen is largely insulated from inflation. "They have a good chunk of business that's cost-plus or time and materials related," Sheehy said. "So they can pass through inflation on a kind of real-time basis to their customers."
Transition To EVs
Allison Transmission makes automatic transmissions for commercial vehicles. Its dividend yield is 2.2%.
Earnings per share are expected to grow 28% this year and 16% the year after, according to analysis by MarketSmith.
Allison's market leadership is a shield against a volatile macroeconomy. "They have an extremely strong competitive position in their market," Sheehy said. That leads to strong margins and free cash flow, Sheehy says.
Also, those factors give Allison the financial strength to make the evolving transition to transmissions for electric vehicles, Sheehy says. Meanwhile, in recent years the company has bought back roughly a third of its outstanding shares and grown its dividend. "I think over time the market will realize that they're better positions in the long run," Sheehy said. "Right now, I think it's a very attractively valued stock."
Volatile Market Vs. This Fund's Stability
In go-go growth markets, the fund's total return can lag the S&P 500's.
Over the past 10 years, for example, the fund's average annual return is 10.35% vs. 13.37% for the S&P 500.
But if you want a fund that generates income better than the market overall and which gives a less volatile ride, this fund can play a role in your portfolio, Sheehy says. "I think that's a fair way of looking at it," Sheehy said. "We're targeting this product for people that would like current income as part of their investment portfolio."
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform.
