Five top dividend funds to buy now provide high yields and a measure of protection if the market tanks again in the weeks and months ahead.
Three top dividend funds benefit from “active portfolio managers” who have the leeway to choose their holdings, unlike less flexible funds whose portfolios track the performance of a market index, such as the Dow Jones Industrial Average, the Standard & Poor’s 500 or the NASDAQ. During the stock market drop in March, active managers were able to reduce the risk of the funds they managed by scooping up quality assets that were selling at sharp discounts.
“There was a lot of forced selling in March because leveraged investors faced margin calls as prices declined,” said Bob Carlson, who is chairman of the Board of Trustees of Virginia’s Fairfax County Employees’ Retirement System with more than $4 billion in assets. “To raise cash, they had to sell assets. They sold high-quality assets because there were no buyers for low-quality assets at the time.”
5 Top Dividend Funds to Buy Offer High Yields
Carlson, who recommends stocks and funds in his Retirement Watch advisory service, said leveraged investors who held high-quality assets unloaded them in distress sales. The selling turned the quality assets into “bargains,” he added.
One of three top dividend funds favored by Carlson is Cohen & Steers Preferred Income & Securities (NASDAQ:CPXAX), with a current dividend yield of 5.83%. The fund seeks total return through high current income and capital appreciation by investing in preferred and debt securities issued by U.S. and non-U.S. companies.
Preferred securities are issued by banks, insurance companies and real estate investment trusts (REITs), as well as utility, energy, pipeline and telecommunications companies.
At year-end 2019, 49% of CPXAX’s holdings were in financials, while 25% were in insurance and 7% in utilities, according to Cohen & Steers. CPXAX offers a “fairly conservative” way to invest in preferred securities because it is an open-end fund, and therefore doesn’t use leverage, Carlson said.
5 Top Dividend Funds Feature Actively Managed Ones
Another fund recommended by Carlson is Cohen & Steers Limited Duration Preferred & Income (NYSE:LDP), featuring a dividend yield of 8.34%. Before the stock market crash in March, the closed-end fund was priced around its asset value in the previous months, selling at either small discounts or premiums to net asset value (NAV), he added.
But in March, the share price dropped sharply in a matter of days and declined far more than the investments held by the fund. At one point, LDP was priced at almost a 30% discount to its net asset value.
Once the Fed provided liquidity to the markets and stocks rebounded, the fund had a strong recovery, Carlson said. It most recently sold at a 0.37% discount to net asset value, which compares to a three-year average discount of 3.14%.
LDP is up 27.75% over the last four weeks, down 16.74% for the past three months and 2.34% for the past year. The bond fund’s distribution yield is up to 8.47% and it has a leverage ratio of about 33%.
In Carlson’s view, the credit markets, not the stock markets, are where the best opportunities will be until the economy recovers. The preferred securities owned by LDP offer a good part of the credit markets, he added.
Infrastructure ETF Ranks Among 5 Top Dividend Funds to Buy
A third recommendation from Carlson is Cohen & Steers Infrastructure (NYSE:UTF), which had been selling at around a 5% to 6% discount to net asset value for a while. During the market panic, the share price fell more sharply than the net asset value and the fund sold at a significant discount.
The share price bounced back strongly when the Fed stepped into the liquidity markets. The gap hasn’t been fully closed with UTF. It recently sold at a 7.79% discount to net asset value, compared to a three-year average discount of 6.28%. UTF has a higher margin of safety now than before the pandemic, Carlson said.
The fund is up 43.61% for the last four weeks and down 24.69% for the past three months. For the last 12 months, UTF has dropped 21.60%. Its current distribution yield is 9.24%.
The fund’s three largest holdings and their portion of the ETF’s portfolio are NextEra Energy Inc. (NYSE:NEE), 6.2%; Crown Castle International Corp. (NYSE:CCI), 6.1%; and American Tower Corporation (NYSE:AMT), 3.3%.
Stable Cash Flows and Strong Balance Sheets Aid Fund’s Appeal
“I also like UTF because most infrastructure companies have relatively stable cash flows and strong balance sheets,” Carlson said. “Their attractive dividends should be maintained or at least will be maintained better than those at many other companies.”
However, exceptions exist with transportation-related companies that are suffering as travel grinds to almost a halt, Carlson said. Energy-related infrastructure firms also are having trouble, he added.
“We have an advantage because UTF is an actively managed fund with a global mandate,” Carlson continued. “It doesn’t have to invest in certain companies, industries, or countries simply because they’re in an index.”
For example, UTF actively reduced its exposure to transportation and energy as the pandemic developed, Carlson said. Industries less sensitive to the economic cycle have been increased, he added.
The managers also are favoring larger companies with strong balance sheets and more predictable cash flows, Carlson counseled. Communications infrastructure is more important, with greater holdings of cell tower and data storage firms, while water utilities also are a relatively safe haven right now, he added.
Cohen & Steers, the fund company where Carlson found his three top choices, is a global investment manager specializing in assets consisting of real estate securities, infrastructure and natural resources equities, as well as preferred securities and other income investments.
Market-Timing Investment Guru Touts Indicators
Despite stocks roaring back off their lows prior to slipping April 20 and 21, they remain at risk for a further drop, and would be vulnerable even in a normal market, said Jim Woods, who leads the Successful Investing and Bullseye Stock Trader advisory services. The peril is heightened during the current bear market after its recent plunge of more than 30%, he added.
The dive more than meets the minimum drop of 20% to qualify as a bear market. To decide when to buy and sell stocks, Woods relies on time-tested indicators to guide him. As of April 21, the Domestic and International Plans he tracks remain in “sell” status, as they have since Feb. 27.
The merit to that approach is reflected by using the S&P 500 as a proxy for domestic stocks to show that since the Feb. 27 sell signal, his strategy dodged a nearly 25% fall through the recent low of March 23.
“That means we successfully avoided that massive decline that took place in just over three weeks,” Woods said.
International Fallout Averted with Safety-Switch Indictor’s Sell Signal
As for international stocks, the use of the iShares MSCI EAFE ETF (NYSE:EFA) as a proxy for those equities signals its all-time closing high on Jan. 2, followed by a recent low on March 23. During that time, EFA dove a harrowing 33.70%.
The market-timing strategy used by Woods in his Successful Investing advisory service also produced a sell signal in his International Plan on Feb. 27. From that date until the low on March 23, EFA crumbled nearly 26%.
In late March, he recommended the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSE:LQD), offering a dividend yield of 3.80%, and the iShares National Muni Bond ETF (NYSE:MUB), with a dividend yield of 2.40%. The addition of LQD and MUB were made for one key reason — the Federal Reserve, Woods told me.
Fed Policies Fuel 5 Dividend Funds to Buy
A key factor that Woods gave for making his recommendation of LQD came from the Fed’s unusual move to announce it would buy almost “anything” involving bonds, including Treasury, municipal and corporate debt instruments, he told me. The Fed’s massive move into markets is what most professional investors wanted and it helped the market surge so strongly from the March lows, he added.
The Fed’s announcement that it would buy municipal bonds added to the merit of investing in MUB, Woods said. The fund has rebounded significantly in the past month, he added.
Five top dividend funds to buy focus on a range of asset classes designed to provide investors with income and share-price appreciation. For investors looking to evade the worst of any additional stock market drops but still benefit from a market crash recovery, these five dividend funds could become good additions to an income-seeking investor’s personal portfolio.