For several months, mutual fund advertisements and newsletters have promoted the virtues of fixed-income, or bond funds, to a public jittery about the stock market. Now, though, a contrarian view is emerging.
A few investors are considering funds that invest in stocks of dividend-paying firms. They see this a safe way to participate in the stock market upturn that will probably precede, then accompany, an economic recovery.
True, traders have been beating down the prices of these companies on the stock market, but many of the larger, well-established firms have kept churning out dividend yields of 4 percent to 6 percent or more.
Meanwhile, the funds that invest in these companies are able to buy more fund shares for investors who have dividend reinvestment plans.
In the mutual fund guidebooks, the funds following this strategy fall into a variety of categories, including growth-and-income, balanced, and equity-income.
For example, the Colonial fund, the flagship of Boston's Colonial Investment Services, is growth-and-income oriented, says its portfolio manager, Chris Bertelsen.
"Buying stocks with high-dividend yields is actually a conservative strategy," Mr. Bertelsen says. If investors are looking for a average annual total return from their entire portfolio of 9 percent to 10 percent a year -- considered a reasonable long-term goal if stocks are included -- stocks with dividend yields of 4 percent to 5 percent or more get you half way there, he adds.
Many of the stocks in Mr. Bertelsen's portfolio are well-known companies with long histories of paying dividends, even when their stocks are doing poorly on Wall Street. They include industrial companies such as Xerox, Dow Chemical and Eastman Kodak; insurance companies such as Cigna and Aetna; and several of telephone companies, such as Nynex, Southwestern Bell, Ameritech and Bell South.
"Even if we continue to bump along the bottom in this economy, this will be a safe haven," Mr. Bertelsen says.
"It makes sense to look at interest-paying stocks and the funds that invest in them," agrees Eric Kobren, editor of Fidelity Insight, a Wellesley newsletter that follows Fidelity Investments' funds. He likes the Fidelity Equity-Income II fund, a fairly new fund that buys less well-known companies than the original Fidelity Equity-Income fund.
"We've been hot on [Equity-Income II] all year long," Mr. Kobren says. "It's been acting super."
Many of the Fidelity stock funds have a front-end load, or sales charge, he notes. This one does not.
While dividend-paying stocks seem great, there's plenty of reason for caution, says Andrew Midler, portfolio manager of Equity-Income II.
"In 1989 and '90, the high-yield part of the universe woefully under performed the market averages," Mr. Midler point out. "High-yield stocks tend to be more mature companies, but they can also be more sensitive to the economy."
A company may pay high dividends for several years, "but dividends can be cut, too," he cautions. "Yields won't be your savior."