For some guidance about dividend stocks, Barron’s recently perused the holdings of 10 top-performing mutual funds over the previous 12 months. We focused on the largest weightings across all of those portfolios.
Morningstar supplied a list of the dozen pace-setting U.S.-domiciled actively managed equity funds whose legal name contains “dividend” or “income.” That group was trimmed to 10 for reasons outlined below.
The funds were ranked based on one-year returns, as of Sept. 30.
For this column, Barron’s focused on large-cap stock holdings, eschewing master limited partnerships, real estate investment trusts, and smaller-cap names. Those holdings, which have performed very well in certain cases and can offer nice yields, are worth a separate look at another time.
Large-cap stocks are widely followed and popular among dividend investors. The six with the biggest combined weightings across the 10 funds we examined tilt toward financials, many of which have been putting through impressive payout boosts since the pandemic started abating.
They are Morgan Stanley (ticker: MS), which recently yielded 2.7%; Bank of America (BAC), 1.8%; medical-device company Medtronic (MDT), 2.1%; pharmaceutical maker AbbVie (ABBV), 4.8%; Wells Fargo (WFC), 1.5%; and technology company Cisco Systems (CSCO), 2.6%. The S&P 500 yields about 1.3%.
Invesco SteelPath MLP Income (MLPZX) was eliminated from the mix because of its focus on minerals and natural resources, and another fund didn’t have updated holdings as of Sept. 30.
To be clear, these six stocks weren’t held by all 10 of these funds, several of which have a small- or mid-cap focus or have a big weighting in master limited partnerships or other assets that offer yields. For example, five of the top-performing funds owned shares of Morgan Stanley as of Sept. 30.
Morningstar took each stock’s weighting in the various funds and tallied those numbers to determine a ranking. So if a stock had a 2% weighting in Fund A and a 3% weighting in Fund B and none of the other funds owned it, its total would be 5%.
The nearly $600 million BNY Mellon Income Stock fund (MPISX) held all of six those stocks, one of the few funds to do so. Its one-year return as of Sept. 30 was about 45%, compared with 29% for the S&P 500. And $5.1 billion Invesco Growth and Income (ACGIX) held five of those names: Morgan Stanley, Bank of America, Medtronic, Wells Fargo, and Cisco Systems, according to Morningstar. Its one-year return: about 47%.
The biggest weightings had shifted from those a year earlier, but some stocks remained in the portfolios throughout the past year. In fact, three of the most heavily weighted dividend issues across the 10 funds at the beginning of the period we analyzed—Morgan Stanley, Medtronic, and Philip Morris International (PM)—stayed in the top 10 as far as their combined weightings across these funds.
There was very little overlap, however, for the top stock weightings between the actively managed funds and the index funds and ETFs. This column will tackle that subject soon.
These are the most popular large-cap holdings among top-performing dividend funds tracked by Morningstar as of Sept. 30
|Company / Ticker||Recent Price||YTD Return||Recent Dividend Yield||Market Value (bil)|
|AbbVie / ABBV||$116.53||14.0%||4.8%||$206|
|Bank of America / BAC||47.88||60.2||1.8||392|
|Medtronic / MDT||121.3||5.1||2.1||163|
|Morgan Stanley / MS||104.66||56.3||2.7||191|
|Wells Fargo / WFC||51.30||71.6||1.5||205|
Note: Data as of Nov. 2.
Sources: Morningstar; FactSet
The Biden administration has proposed implementing a 1% excise tax on stock buybacks, as part of the Build Back Better framework. In theory, at least, this could be positive for dividends, as companies might lean toward them to avoid the tax.
But whether such a tax comes to fruition remains uncertain, and the political environment for the Democrats has become even more treacherous following this week’s elections in Virginia, New Jersey, and elsewhere.
Chris Senyek, chief investment strategist at Wolfe Research, views the proposed levy as another increase in the corporate tax rate. “At a 1% excise tax, I don’t think it’s a needle mover,” Senyek tells Barron’s. But “It could at the margin cause some companies to rethink capital-allocation strategies because of the tax, and sometimes companies are more sensitive to it than investors.”
In September, Sens. Ron Wyden (D-Ore.) and Sherrod Brown (D-Ohio) proposed a 2% excise tax on buybacks carried out by public companies.
Senyek says a 2% tax “starts to get the conversation going” in terms of how companies allocate their capital and return some of it to shareholders.
An excise tax on buybacks would help the federal government raise money—about $125 billion annually, the White House estimates.
“They need the money, and it seems to have some support, based on people I speak with—more so than other forms of taxation,” comments Senyek. He believes that the bigger concern is that such a tax would eventually move up, to raise more revenue.
Robert Willens, who runs a tax and accounting consultancy, says that the tax would be based on “1% of the fair market value of any stock which is repurchased” by a corporation covered by the legislation.
One potential outcome Willens sees if the Biden proposal takes effect is “a wave of stock buybacks in the last two months of 2021 before the new tax takes effect.”
Buybacks slowed considerably in 2020, owing to the pandemic, and with the large U.S. banks temporarily restricted by regulators from repurchasing their shares. But those restrictions have been lifted.
Stock repurchases among S&P 500 companies totaled about $520 billion last year, down from nearly $730 billion in 2019, according to S&P Dow Jones Indices.
However, in 2021, they’re running ahead of last year’s pace, with S&P 500 companies having bought back about $550 billion worth of shares, year to date, says senior index analyst Howard Silverblatt of S&P Dow Jones Indices.
Write to Lawrence C. Strauss at firstname.lastname@example.org