Mutual Fund Site

Without question, investing in equity funds right now is a wise decision. This statement contradicts what a lot of people have been doing, which is selling their domestic growth funds and buying into emerging markets funds as well (get ready to gasp) bond funds. Despite some of the favorable forecasts for emerging markets, there is very little to be optimistic about bond funds. In fact, many dividend paying securities (about 68 according a report at Bloomberg) that are part of the broad S&P 500 Index are paying dividends of 3.8% or higher, which represents dividend yields that are better than bond yields (currently at 3.72% for a 30-year government bond).

Dividend Funds Are Preferred Over Bonds

One of the top-ranked dividend funds to come across our radar is the
Prudential Jennison Equity Income Fund (SPQAX). As a dividend fund, this investment has a long history of rewarding investors with high returns and average risk when compared to other similar funds in its Morningstar category (of Large Cap Value). This justifies the 5-star rating at Morningstar for its 1- and 5-year as well as their Overall rating. It is also ranked as #1 in its category for its 1-month, YTD, 1-year, and 5-year performance. In other words, this dividend fund is one that has earned the respect of the industry.

Speaking of respect, this dividend fund has recorded returns that put both the broad S&P 500 and its category behind it. These are hard, cold numbers that prove how well this fund has performed. Since 2006, this fund has beat its peers and the Index by as much as 16% and 18% respectively (in 2009). In 2008, arguably the worst year in recent history for equities, it was flat against both the Index and Category (beating both by just 0.7% and 0.8% respectively).

Anatomy of Top Dividend Fund

Of course, historical returns mean nothing when looking into the future. So as always the Mutual Fund Site likes to look at its core holdings to see whether or not we agree with the fund’s composition and direction. With the Prudential Jennison Equity Income Fund, we see that roughly 50% of their holdings are domestic. While we believe that domestic equities are one of the most attractive areas for growth, we also realize that dividend income and short-term growth might be better found elsewhere. With that in mind, the fact that so much is invested outside of North America is not all that bad for its dividend yield of a breath-taking 5.8%.

Digging deeper, we notice that its top sector holdings are: Consumer goods at 15.6%, Financial Services at 15.4% and Energy at 14.4%. Overall, there is not a whole lot of concentration risk with this fund. Our concern would normally be the financial services holdings for this type of fund, but its representation is well below the Category average and of its Top 25 Holdings, only 2 are financial services.

On a security level, this fund has done quite well with its Top 25 holdings. Its largest financial services holding, First Potomac Realty Trust at just 1.78% of holdings, has returned over 26% on a YTD basis; its second largest holding, Annaly Capital at 1.39% of holdings has returned over 9%. Overall, well diversified and strong choices (evidently).

Its largest security holding, B&G Foods, represents less than 3% of total holdings and has returned 22% on a YTD basis. This is an impressive return for a company that is well diversified in terms of operations. Another big plus: its dividend yield is over 6%.

Some of the Risks With This Dividend Fund

Overall, this dividend fund will not satisfy everyone. It is rather specialized in that its shifting investment style (it has been a midcap value fund for two of the past five years) may not coincide with market and/or sector rotations, posing some risks for investors. As well, its large non-US exposure might make sense today and this year, but could result in increased risk in the coming years, especially now as domestic companies start to see a quicker return to profitability and start boosting their dividends as well.

Still, the numbers speak for themselves. For an investor with even mild risk tolerance, this fund will meet their needs quite well. Returns have been strong and this mutual fund is evidently well diversified and well managed.