Fidelity Dividend Plus Fund

Analysis: There is always concern when a portfolio manager leaves, as was the case with this fund in October 2011 when Cecilia Mo left for Dynamic. Don Newman stepped in, and really hasn’t missed a beat. Performance has remained strong on an absolute and risk adjusted basis while volatility has been lower than both the index and the category average.

This was formerly known as the Fidelity Income Trust Fund, but Fidelity renamed it to Divided Plus and expanded its mandate considering the taxation changes to income trusts. Today, it invests in high yielding equities, REITs and other equity income investments. The portfolio is managed using a bottom up approach that looks for reasonably valued, high quality companies that have the potential to maintain and grow their dividends over time.

In reviewing a company, they place a high emphasis on the strength of the balance sheet. They also look for strong free cash flow generation and an improving earnings picture. One very interesting aspect of their process is how they take the cyclical nature of market and economic cycles into account. For example, when we are in an early to mid cycle period, they will place more emphasis on earnings growth potential, while later in the cycle, valuation becomes more of the focus. The portfolio has a target yield of 1.5 times that of the S&P/TSX Composite Index.

Given the bottom up approach that is used, sector weights are largely the byproduct of Mr. Newman’s stock selection process. It is a diversified portfolio, holding around 80 names, with the top ten making up 37%. The strategy is fairly active, with portfolio turnover averaging more than 70% in the past five years.

The manager is somewhat cautious given the continued headline risk in Europe and doubts about the sustainability of the U.S. recovery. As a result, the fund is defensively positioned with very little exposure to economically sensitive sectors such as energy and materials. As of August 31, it held 53% in Canadian equities, 27% in foreign equities and 20% in cash. It has a significant exposure to REITs.

While the name may suggest dividends, the reality is that it does not offer much in the way of income to investors. It pays a variable distribution, which combined have totaled $0.1028 over the past year. This works out to an annualized yield of less than 1%.

Considering the above, we believe that this can be a good core equity fund for most investors. It offers lower than average volatility, strong absolute and relative returns, and a reasonable cost.