Dividends make a big difference in investment returns, particularly when the overall stock market is not likely to be very strong, says E. Clifton Hoover Jr., lead manager of the $1.4 billion PIMCO Funds:NFJ Small Cap Value/A (PCVAX).
Hoover expects that the overall stock market will return only about 4% to 5%, annualized, over the next few years. As a result, he said, “it’s the 3% dividend that puts you on the way to above-average market returns.”
He is enthusiastic about the dividend tax cut signed into law recently by President Bush. “As the baby boomers move into their retirement years,” Hoover said, “they will need more yield” and will seek out the new tax advantages of dividend-paying stocks.
All of the 100 or so companies in the fund pay dividends. If a company eliminates its dividend, shares are sold immediately, he said. Over all, the dividends of the portfolio companies average 3%, compared with about 2% for companies in the benchmark Russell 2000 value index.
He starts by screening roughly 4,500 American companies with market capitalizations of $100 million to $1.5 billion at the time of purchase, eliminating companies that pay no dividends.
He sorts the remaining stocks into about 160 industries and discards companies in the top one-fifth of a ranking based on their trailing and p
The 500 or so remaining candidates are filtered through what Hoover calls a “price momentum” model based on the moving average of their stock prices over the previous 49 weeks. He eliminates companies whose stock prices lag behind the overall market.