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Activity Of Dividend Growth Funds Managers: A Way To Disaster

Dividend investment became very popular at Wall Street probably because many investors are looking for reasonable income in almost zero interest bond world. As the results tons of dividend ETFs and mutual funds (MFs) have been created in last few years. More sophisticated investors (at least IMO) recognized that they need to deal with almost official policy of continuous inflation in many developed and emerging countries. The answer to this challenge is dividend growth investing (DGI) which is actively discussed here in Seekingalpha.com. DGI attracted many d-i-y investors and some consumer-oriented Wall Street firms. One of the reasons of recent DGI popularity might be a cause of the fact that DG stocks outperformed high-yield dividend stocks during last few years. Such even happens quite rarely in the past for only very short periods of time (see figure 1).


Figure 1.

If this trend continues we might see a scholar paper with title like "Surprise! Higher Dividends Growth = Higher Total Return" in a decade or so (BTW, I'd strongly recommend to read paper "Surprise! Higher Dividends = Higher Earnings Growth" written by the two top experts in stock market Robert D. Arnott and Clifford S. Asness).

OK, back to MFs.

I screened Morningstar MFs database with keyword "dividend" and got bunch of funds. I assume that e.g. differences in holding for Oppenheimer Rising Dividends A Fund OARDX and Oppenheimer Rising Dividends B (and C and I and R) funds OBRDX, OCRDX, OIRDX, ONRDX, hence I manually selected 1 fund for each family. Then I used words growth and rising to pick DG funds. I probably lost some DG funds during such selection but I think I got representative pool of MFs.

I collected information I needed for these MFs using very nice software DATATOOL (http://datatoolbar.com/) recently highlighted by Fernando Soriano (seekingalpha.com/instablog/16298042-fern...). Nice features of this very user-friendly software that it allows to combine information for different stocks or funds from various WWW sites into MS-Excel file.

The figure 2 (also given as a table below) presents the resulted collection.

Symbol

Fund Name

MS Category

Assets US$ Mil

Fees

Turnover

VDIGX

Vanguard Dividend Growth Inv

Large Blend

25600

0.32%

23%

FRDPX

Franklin Rising Dividends A

Large Blend

15500

0.92%

9%

FDGFX

Fidelity® Dividend Growth

Large Blend

7200

0.68%

64%

IHGIX

Hartford Dividend and Growth A

Large Value

7200

1.02%

23%

OARDX

Oppenheimer Rising Dividends A

Large Blend

4800

1.05%

60%

PRDGX

T. Rowe Price Dividend Growth

Large Blend

4500

0.64%

25%

GSRAX

Goldman Sachs Rising Dividend Growth A

Large Growth

3000

1.13%

25%

NSBAX

Nuveen Santa Barbara Dividend Growth A

Large Blend

2500

1.00%

28%

LAMAX

Lord Abbett Calibrated Dividend Growth A

Large Blend

1800

0.85%

58%

SDVGX

Sit Dividend Growth I

Large Blend

1000

1.00%

58%

AVEDX

Ave Maria Rising Dividend

Large Blend

719.3

0.92%

29%

CDGRX

Copeland Risk Managed Dividend Growth A

Large Blend

416.8

1.45%

142%

DRDAX

Dearborn Partners Rising Dividend A

Large Blend

158.7

1.50%

10%

WCDGX

Westfield Capital Dividend Growth Inv

Large Blend

88

1.20%

133%

WHGDX

Westwood Dividend Growth Institutional

Large Blend

59.8

0.91%

67%

CMDGX

Meydenbauer Dividend Growth No Load

Large Blend

54.2

1.16%

49%

SDVAX

SunAmerica Select Dividend Growth A

Large Value

45.4

1.48%

79%

CDGCX

Crawford Dividend Growth C

Large Blend

35.5

1.96%

25%

CADVX

Calamos Dividend Growth A

Large Value

33.6

1.35%

108%

GBCAX

Gabelli Dividend Growth A

Large Blend

26.3

1.89%

23%

PJDAX

Prudential Jennison Rising Dividend A

Large Blend

9.2

1.24%

45%

IMSAX

IMS Dividend Growth

Large Value

8.2

1.95%

87%

ORDAX

Oak Ridge Dividend Growth A

Large Blend

0.3

1.25%

18%

   

AVERAGES

3250

1.17%

51.65%

Figure 2.

Most selected MFs are belong to "Large Blend" Morningstar category with assets from 300K$ (probably comparable with assets of a matured d-i-y DG investor) to more than 25 billions US$. Average fees 1.17% are smaller than average fees for all MFs (~ 1.5%) covered by Morningstar but IMO still high especially for Large Blend/Value/Growth categories which deal with most liquid stocks. I guess huge turnover (average above 50%) which is non-typical for DGI is used by these MF managers to defend high fees they charge for their funds. I doubt that some managers (as well as some SA members) really understand that DGI is not a trading strategy. On another hand, MFs as well as ETFs are open-end funds and their managers must act in accordance with cash flow in/out a fund. Also most MFs have requirement to be at least 80% or 95% invested and it gives MF managers very small room for flexibility. Recent outperformance of DG stocks (see fig. 1) leads to very small initial yield of these MFs in the range of 2%. With 1.17% average fees (more than half of initial income!) the detected super-activity of some MF managers (which create spread losses, taxes on short-term capital gains, etc.) might lead to disaster for investors with prime goal to have good income stream.

Therefore, I think that MFs are not the best vehicle for DGI (see seekingalpha.com/instablog/725729-sds-se... for alternative).

SDS

18 March 2016

Additional disclosure: My portfolio has some of stocks as portfolios of mentioned MFs