Looking at the underlying holdings of the dividend fund reinforces what a unique offering it is. Unlike most traditional dividend funds that are heavily weighted towards banks and energy, this Cecilia Mo managed fund has only 12% invested in financials, 5% in REITs, and 18% in energy. These are well below not only the benchmark, but the category average.
While Ms. Mo has managed this fund since late 2011, its mandate is very similar to the Fidelity Dividend Plus Fund, which she ran with great success from 2005 until 2011. Her research driven, bottom up approach to find high yielding stocks that are trading at a discount remains the same. She targets a dividend yield of between 3% and 4%, but also focuses on a company’s fundamentals to ensure that the dividends are sustainable, and likely to grow. She focuses on a company’s payout ratios, balance sheets and earnings growth opportunities.
Valuation is also key to her process. She believes that by buying a company below its worth provides a strong margin of safety, helping to protect capital. She targets an annualized return of between 7% and 8%, of which half is expected to come from dividends.
Since taking over, she has more than met her return target, with an annualized three year gain of 16.7% at the end of August. Clearly this level of absolute return is not sustainable going forward, but I do believe that she will be able to continue to deliver above average returns.
One drawback to her process is that has historically been more volatile than other dividend funds. Her funds tend to be more in line with the volatility of a more traditional equity fund. Not a deal breaker by any stretch, as long as you are comfortable with the extra risk.
There are a number of reasons to like this fund including the manager, the process, and of course, her long term track record. Another positive is that it boasts an MER of 1.60%, which is one of the lowest in the category. It pays a monthly distribution of $0.055, which works out to an annualized yield of 4.4%. If you are comfortable taking on a higher level of risk, this is a fund that should be considered.