The record is clear—dividend-focused exchange-traded funds have led the pack in terms of annual returns—but funds overseen by active managers also have lots to offer to income-focused investors.
Last week, this column featured the top five dividend-focused funds based on five-year annual returns. All five were index trackers, like the overwhelming majority of ETFs. This week, we looked at the best-performing actively managed funds.
The top five are included in the accompanying table.
*As of Feb. 28. Morningstar defines a 12-month yield as the sum of a fund’s trailing 12-month interest and dividend payments divided by the last month’s ending share price plus any capital gains distributed over the same period.
The funds we featured last week had an edge over actively managed portfolios, notably lower expense ratios. This week’s dividend-focused funds have higher costs, but offer investors the chance for outsize gains—or to avoid losses—based on the managers’ judgment.
ETFs typically track an index. That’s a less expensive endeavor than running an active portfolio in which the manager selects all of the stocks. With research and other expenses, active management is often a more costly way to run a fund.
“Generally speaking, the ETFs have an inherent advantage” and generally charge lower fees than actively managed funds do, says Ben Johnson, director of global ETF research at Morningstar.
The five active funds on our list of top performers have an average expense ratio of 0.83%. That’s more than double the 0.40% for the ETFs that we highlighted last week.
Johnson sees another advantage that ETFs can have over active funds. An ETF’s strategy, he says, “is very clear, and the implementation is very strict.…That element of discipline can prove to be advantageous in many cases.”
All five portfolios shown in the table finished in the top 10% of a list of about 250 dividend-oriented funds, including ETFs, provided by Morningstar. The funds are ranked based on five-year total returns as of Feb. 28.
What stocks are the active managers picking? There are some common threads: Two stocks held by many of the top five actively run funds are
(ticker: MSFT) and
(JPM), Both handily outperformed the S&P 500 index over five years, dividends included.
The $13.1 billion
Columbia Dividend Income fund
(GSFTX) has put many of its chips on technology, giving tech its biggest sector weighting. Technology recently accounted for a little bit less than 20% of the fund’s assets.
As of Jan. 31, its largest holdings included Microsoft,
The balance sheets of such technology companies in general are very clean, says Michael Barclay, a manager of the fund. The fund’s much smaller recent consumer-staples weighting of 8.6% partly reflects the high leverage of companies in that business, he says.
The fund’s five-year return is 10.41%, placing it fifth on the list among actively managed funds.
The top performer is the $337 million
Matthews China Dividend fund
(MCDFX), which sports a five-year annual return of 10.85%, one of two actively managed funds to outperform the S&P 500’s 10.67% result.
“The managers insist on a clear dividend policy—and a commitment to growing the dividend—as well as stable cash flows, strong balance sheets, and solid franchises,” according to Morningstar.
The Matthews fund’s largest holdings as of Dec. 31 included
(CHL), which was recently yielding 3.7%, and electric utility
China Resources Power Holdings
(836.Hong Kong). China Resources yields around 6%.
Another top performer is the $10 billion
T. Rowe Price Dividend Growth fund
(PRDGX), whose five-year annual return is 10.81%, second on the list.
The fund’s approach is straightforward, focusing mostly “on dividend-paying firms that are financially healthy enough to sustain and grow their payouts,” according to Morningstar.
As of Dec. 31, its top five holdings were Microsoft,
(UNH), JPMorgan Chase,
The much smaller $220 million BMO Dividend Income fund (MDIVX) placed third among active funds, with a five-year annual return of 10.46%. It has a large-cap value bent. The fund’s top holdings as of Jan. 31 included Microsoft,
(VZ), Pfizer, Cisco Systems, and
The fifth fund in the table is the
Buffalo Dividend Focus
(BUFDX). With assets totaling $57 million, it is by far the smallest on the list.
Morningstar considers it a large-cap blend portfolio. Its top holdings will sound familiar. They recently included Microsoft, Visa, and Apple.
Write to Lawrence C. Strauss at email@example.com