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It Pays to Wait

Investors face choppy markets in this period of heightened economic uncertainty. With earnings growth likely to be subdued, dividend payments can go a long way. This equity fund will generate plenty of income for investors until the economy turns around.

Huntington Dividend Capture (MUTF:HDCAX) launched in 2001, a time when most investors focused on capital gains rather than dividends.

Co-managed by Kirk Mentzer and Randy Bateman, this value-focused fund generates high income and keeps portfolio volatility relatively low. The fund invests primarily in three asset classes: common stocks, real estate investment trusts (REITs) and fixed-rate preferred stocks.

The fund’s investment strategy focuses on total rate of return. “Looking back 80 years, dividends represent roughly 45 percent of the total return for the equity market,” says Mentzer.

But management doesn’t forsake fundamentals for the sake of a higher yield. “Big yields don’t necessarily mean big returns. If the company is in trouble, even with a high yield, it will underperform the market,” Mentzer notes.

Based on one- and five-year returns, the highest-yielding names in the manager’s “Super 1500” usually underperform. Mentzer has repeated this study over a number of years and consistently found that stocks which yield 2 to 3 percent produce the best returns.

Mentzer and Bateman target names with positive earnings revisions, attractive price trends and strong growth prospects. When selecting preferred stocks for the portfolio, the duo focuses on credit quality because the market for these securities isn’t as active as the one for common stocks.

The managers also cycle through names with upcoming dividends. Once the company pays its dividend, Mentzer and Bateman replace the holding with an equally or more attractive stock that has an upcoming dividend. “We’re always looking for the next dividend-paying stock to keep payouts high for investors,” says Mentzer.

Mentzer worries that the expiration of the Bush tax cuts could pose a huge risk to dividend-paying stocks. He’s looking to avoid some of the pain by increasing the portfolio’s exposure to foreign equities. The fund’s current international holdings are from developed markets, with European equities leading the way.

“European markets have been clobbered, but many names offer attractive dividends and low valuations. Price-to-earnings multiples are considerably lower than in the US markets,” says Mentzer.

Health care firm AstraZeneca (LSE: AZN, NYSE: AZN) has featured in the portfolio for quite some time. It’s a high-quality company with solid earnings and price trends, and the stock yields over 4 percent.

The health care sector has lagged the broader market of late, but management has increased the fund’s exposure to the industry to take advantage of attractive valuations. Mentzer maintains that the group offers the best opportunities of all the other defensive sectors.

Mentzer and Bateman also look to energy, especially integrated names that boast a broader base of revenue sources. Chevron (NYSE: CVX), one of the fund’s largest holdings, yields 3.7 percent.

Mentzer expects economic growth to decline in 2010 and 2011. The US economy won’t suffer a double-dip recession, but fearful investors can count on this fund to pay out while they wait for a turnaround.

Why to Buy

Huntington Dividend Capture (HDCAX)

  • Monthly income payouts
  • Low-volatility portfolio
  • Good total return profile over a full market cycle
Hannah Hsu is Research Editor of Louis Rukeyser's Wall Street

Disclosure: no positions

Disclosure: no positions