Mutual Fund Site

As far as dividend funds go, the Invesco Diversified Dividend Fund (LCEIX) has managed to secure itself some high returns, making it a natural short-list favorite among investors who are looking for dividend mutual funds as part of their investment strategy. What makes this Invesco mutual fund such an easy choice also has a lot to do with its consistent returns, consistently beating its peers (overall) when it comes to risk-adjusted returns.

Interestingly enough, this mutual fund has managed to earn above average returns over the past 5 years. Currently, it holds 90% domestic equities, itself a difficult achievement given the volatility the markets have shown on a year-to-date basis, particularly with how this fund invest: primarily, it adopts a large cap, value/blend approach. Kudos for that.

Unlike other funds in its category, the Invesco Diversified Dividend fund has stepped back from IT and media plays, clearly taking an underweight position in those areas and instead beefing up in the Industrial Materials, Consumer Goods and Financial Services segments. This makes a bit of sense when you look at the underlying assets. Its biggest earners have been Fifth Third Bancorp (26% YTD return), SunTrust Banks (24% YTD return), Eaton Corporation (23%), Marriott Corporation (22%) and Emerson Electric (20%). These are all top 25 holdings and clearly strong performers.

At the Mutual Fund Site, our biggest concern with the investment style is the fund’s heavy investment in manufacturing type companies. While these have clearly provided some good returns, the uncertainty surrounding the manufacturing sector and its reliance on consumer spending could have terrible implications for these securities, particularly these days when you hear about consumers spending less thanks to the “slow recovery.” What people should be worried about is the company’s ability to continue paying dividends even in the face of slowing demand.

What we like to see here is its marginally below weight holdings of financial services firms. This has been an extremely popular segment and has quite possibly become overbought, resulting in longer term cost problems for some funds. But even if we are right about high price of entry here combined with a lack of profits thanks to slower than expected consumer spending, this fund’s financial services choices are brilliant, having opted for strong financial services firms that pay decent dividends and have strong fundamentals backing them.

Even the non-financial firms in their top holdings — looking at Emerson Electric, Eaton and Marriott for example — are also strategic and relatively worry free choices. All three companies have seen year-over-year quarterly results improve, they continue to have strong balance sheets and they are among the leaders in their industries and, as evidenced by their returns, have been worthwhile investments for the fund.

As for dividend funds, we continue to favor the Vanguard Dividend Fund given its smart investment style and consistency. But with an entry level of $1,000, this Invesco comes with an entry level that is 1/3 of the Vanguard fund, making it more accessible to more investors. And with the performance record that it enjoys, it will obviously appeal to a lot of mutual fund investors as one of the easiest dividend funds one can own.