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Abstract: While dividend-paying stocks have done better than the S&P 500 through mid-February, Lipper fund flow data shows that they are no longer the only game in town when it comes to U.S. equities.

Investors may have taken their foot off the gas pedal when it comes to equity income fund flows and many of the dividend-paying stocks they hold, but they certainly have not applied the brakes just yet.

The latest data as a February 14, 2013 from Lipper shows a weekly outflow of $156 million, keeping the first two weeks of February slightly positive at a net of $48 million. But February has been a weaker month than January the past two years, seen in the table below, as many investors change and/or add to their fund allocations on a quarterly or annual basis.

According to Matthew Lemieux, Sr. Research Analyst at Thomson Reuters Lipper, investors still seem comfortable with finding yield in equity. On a monthly basis since July 2010, Equity Income has seen 31 out of 32 consecutive periods of positive inflows Fund flows stand at $2.57 billion since the beginning of 2013. If flows continue at the same rate, the first quarter should come in at around $5.15 billion.

The sole negative month for equity income fund flows was December 2013, amid the uncertainty of 2013 dividend tax rates spooked many dividend investors, presumably with taxable dividend exposure, out of dividend-paying equity income funds. Likewise, Lemieux mentions the lower rate of funds coming into equity income so far this year as possibly some of the remaining impact of the changes in dividend and capital gains starting in 2013. Lemieux also sees a stronger acceptance of a broader equity market, to the point that equity income is no longer the only (domestic) equity strategy in town. Lipper data shows is beginning to show that core equity in the form of mid cap, small cap and multi cap receiving some interest where there hadn't been much in the past.

Seen on a quarterly basis in the table below, Lipper equity income fund flow data show the impact of tax uncertainty showing up in the fourth quarter of 2011, with a slight quarterly withdrawal level of $120 million. Adding up the data shows 2010 was a strong year, with $30.9 billion of inflows. Perhaps without the uncertainty associated with the so-called U.S. 'fiscal cliff' one would have seen more of a commitment to equities across the board.

According to Lipper Director of Research Tom Roseen, the performance of the larger funds in the past one-year and three-year periods has been in general lower than that of their respective benchmarks, most typically the S&P 500, the Russell 1000 or Russell 1000 Value indices. That seems to matter less to investors, who seem more focused in many cases on replacing the yield they've historically received through fixed income products.

Dividend Stock Performance Update

The chart above shows the total return performance (price change with dividends reinvested) of the S&P 500 (SPY.N) in the blue line, up 11.4% since March 22, 2012 when we published our 2012 Thomson Reuters Dividends List (more on the characteristics of the stocks on the list is below). The Vanguard Dividend Appreciation Fund (VIG.N) in green is up 12.8% and the static TR Dividends List is up 13.9%.

Dividend stocks continue to be slightly favored in 2013 through February 15, with the TR Dividends up 7.7%, while the Vanguard VIG is up 7.3%, followed by the S&P 500 up 6.8%.

Thomson Reuters Fundamental Research produces a list of dividend paying stocks that contain several potentially attractive investment characteristics:

  • Liquidity - 200,000 shares/day or more trading volume
  • Higher than average S&P 500 dividend yields, though not the highest yields
  • Lower (higher) than average dividend payout (retention) rates - companies with higher than average yields and also lower than average dividend payouts (50% or less) are able to use retained earnings to grow internally and with less dependence on additional external debt or equity financing
  • Earnings Quality threshold - ensure the majority of past earnings are sustainable into the future (eliminates any names with StarMine Earnings Quality scores from 1-20 out of 100 as a filter)
  • Account for Credit Risk - use StarMine SmartRatios Credit Risk model scores (eliminates any names with scores of 1-10 out of 100 as a filter)

The resulting list includes the following 59 dividend-paying, higher than average yield and lower than average stock symbols alphabetically: ADM, AFL, ALV, APD, AXS, BBT, BKU, BLK, CA, CCL, CFR, COP, CPB, CSX, CVX, DPS, ETN, FCX, GCI, GD, GES, GIS, GNTX, GPC, HBAN, HLF, HPQ, HUN, INTC, JPM, KLAC, KRO, KSS, LLL, MAT, MMC, MMM, MSFT, MTB, NEE, NOC, NSC, OXU, PFE, PNC, PRE, RTN, SLM, SPLS, STJ, STX, SWY, SXL, TAP, TRV, VR, WAG, WSH, WU.

Ticker

Company Name

TRBC Economic Sector

Market Cap (MM $US)

FCX

Freeport Mcmoran Copper & Gold-A

Basic Materials

33,388

APD

Air Products & Chemicals

Basic Materials

17,922

HUN

Huntsman Corp

Basic Materials

3,889

KRO

Kronos Worldwide Inc

Basic Materials

2,325

CCL

Carnival Corporation

Consumer Cyclicals

29,409

MAT

Mattel Inc

Consumer Cyclicals

12,627

GPC

Genuine Parts Co

Consumer Cyclicals

10,107

KSS

Kohl's Corp

Consumer Cyclicals

9,709

SPLS

Staples Inc

Consumer Cyclicals

7,736

ALV

Autoliv

Consumer Cyclicals

6,554

GCI

Gannett Inc Del

Consumer Cyclicals

4,249

GNTX

Gentex Corp

Consumer Cyclicals

2,734

GES

Guess ?

Consumer Cyclicals

2,119

WAG

Walgreen Co

Consumer Non-Cyclicals

35,971

GIS

General Mills Inc

Consumer Non-Cyclicals

26,717

ADM

Archer Daniels Midland Co

Consumer Non-Cyclicals

18,881

CPB

Campbell Soup Company

Consumer Non-Cyclicals

11,294

DPS

Dr Pepper Snapple Group Inc

Consumer Non-Cyclicals

9,490

TAP

Molson Coors Brewing Co

Consumer Non-Cyclicals

6,923

SWY

Safeway Inc

Consumer Non-Cyclicals

4,397

HLF

Herbalife Ltd

Consumer Non-Cyclicals

3,478

CVX

Chevron Corp

Energy

216,053

COP

ConocoPhillips

Energy

71,875

OXY

Occidental Pete Corp

Energy

63,324

SXL

Sunoco Logistics Partners Lp

Energy

5,396

JPM

JPMorgan Chase & Co.

Financials

169,771

BLK

Blackrock Inc

Financials

36,072

PNC

PNC Financial Services

Financials

31,489

TRV

Travelers Cos Inc

Financials

27,792

AFL

AFLAC Incorporated

Financials

25,354

BBT

BB&T Corporation

Financials

21,038

MMC

Marsh & Mclennan Cos Inc

Financials

19,337

MTB

M & T Bank Corp

Financials

12,932

SLM

SLM Corp

Financials

8,042

WSH

Willis Group Holdings Plc

Financials

5,925

HBAN

Huntington Bancshares Inc

Financials

5,621

PRE

Partnerre Ltd

Financials

4,989

AXS

Axis Capital Holdings Ltd

Financials

4,338

CFR

Cullen Frost Bankers Inc

Financials

3,427

VR

Validus Holdings Ltd

Financials

3,212

BKU

Bankunited Inc

Financials

2,351

PFE

Pfizer Inc

Healthcare

190,764

STJ

St Jude Medical Inc

Healthcare

11,282

MMM

3M Co

Industrials

66,426

ETN

Eaton Corp Plc

Industrials

26,267

GD

General Dynamics Corp

Industrials

25,142

CSX

CSX Corporation

Industrials

20,803

NSC

Norfolk Southern Corp

Industrials

20,002

RTN

Raytheon Co

Industrials

19,337

NOC

Northrop Grumman Corporation

Industrials

16,732

WU

Western Union Company (The)

Industrials

8,209

LLL

L-3 Communication Holdings Inc

Industrials

7,294

MSFT

Microsoft Corp

Technology

232,463

INTC

Intel Corporation

Technology

106,387

HPQ

Hewlett Packard Co

Technology

29,261

STX

Seagate Technology

Technology

12,061

CA

Ca Inc

Technology

10,444

KLAC

KLA-Tencor Corporation

Technology

8,254

NEE

Nextera Energy Inc

Utilities

29,844

In a world that continues to thirst for yield, looking in the right places in equities makes all the difference.

Source: Equity Income Funds No Longer The Only Game In Town