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Equity Income Funds -- The Foundation of a Diversified Portfolio Sponsored Links

Equity Income Funds -- The Foundation of a Diversified Portfolio

Copyright 2006 Rafael Velez

2006 is another strong year for dividends.

By Rafael Velez
Category: 0

Submit your Articles Here!

Copyright 2006 Rafael Velez

2006 is another strong year for dividends. For the third
year in a row, a growing number of companies have either
increased their dividends or begun paying dividends. In
addition, more investors are paying attention to the solid
companies that are capable of paying dividends. That is a
big change from the late-1990s, when investors by and large
shunned yields and many companies refrained from paying
them, so that stock market yields in the U.S. plunged to
unprecedented lows. History shows, though, that over
longer periods of time dividends have always been an
essential component of total return, regardless of which
direction the market has headed. Between 1926 and 2004,
dividends accounted for roughly 40% of the average annual
return of the U.S. stock market.

Another impetus for the dividend resurgence, of course, has
been the Jobs & Growth Tax Relief Reconciliation Act of
2003, which lowered the maximum tax rate on long-term
capital gains and qualified dividends to 15%. With a more
level playing field between the taxation of capital gains
and dividends, companies can more clearly decide what
allocation of capital is best for shareholders over the
long-term rather than what is more tax-efficient.

There are relatively few individual securities that provide
a high current yield and grow their dividends, so the
challenge for portfolio managers is to build a portfolio of
companies that, as a whole, meet both criteria. That
requires in-depth, company-by-company, and increasingly,
global research. The search often begins on familiar
terrain. Electric utilities, oil and gas companies, real
estate investment trusts and banks are classic examples of
sectors that have traditionally paid generous dividends and
increased them in order to make their stocks appealing to
investors.

Our firm continues to recommended equity income funds to
clients as core holdings in a diversified portfolio, as a
part of their college savings plan or to produce reliable
quarterly income in retirement. While these holdings have
delivered above average returns for years, it is important
to remember that it is not the objective of the funds to
beat a stock market index such as the S&P 500. (The S&P
500 consists of 500 stocks representing major US industry
sectors.)

It is the objective of the funds to provide an attractive
long-term return by pursuing a conservative strategy
focused on providing above-average current income and
growth of dividends over the years. Although the majority
of assets have typically been held in U.S. based companies,
the funds have the flexibility to invest anywhere in the
world. In the past, the U.S. stocks provided some of the
most reliable dividend income in the world. Now, the U.S.
is a relatively paltry source of dividend income, and
superior yields and dividend growth come from companies
based in Europe and Asia. Many of these equity income
funds feature low expenses, experienced managers, limited
volatility and steady long-term performance.

(Review the prospectus before investing. Past performance
is no indication of future results.)

Source: Triump of the Optimists, 101 Years of Global
Investment Returns, Dimson-Marsh-Staunton


----------------------------------------------------
Rafael O. Velez III is the Managing Director and Registered
Principal of Summit Financial Advisors, LLC, based in San
Mateo, California. Additional resources and ideas are
offered on their Web site, http://www.summit-advisors.com .
Please e-mail comments about this article to
rafael@summit-advisors.com.


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