Equity income fund managers must juggle growth and demands for high yields


May 17, 1992|By WERNER RENBERG | WERNER RENBERG,1992, Werner Renberg

Of the many statistics that flow continuously out of Standard & Poor's computers, Brian C. Rogers awaits none more eagerly than the monthly report on how many companies' boards of directors voted to raise, cut or omit the dividends paid owners of their common stocks.

The figures tell Mr. Rogers at least two things:

* How directors view the prospects for their companies and, in the aggregate, for the economy. A board, for example, is less likely to declare a higher dividend if members lack confidence that revenues and profits will rise enough to let them maintain it in the future.

* How easy or difficult it will be for him to do his job and pay dividends that will please his own shareholders.

As president of T. Rowe Price Equity Income Fund, Mr. Rogers was pleased when S&P reported that 136 corporations raised their dividends in April, compared with 106 in April 1991 -- the sixth consecutive month in which increases topped the year-ago number.

"Good news," he proclaimed. To him, the directors' actions reflected their feeling that "better things are on the horizon."

Since his fund is designed for equity investors "seeking a high and growing level of dividend income," it's easier for Mr. Rogers to find suitable stocks for his portfolio when dividends are being increased.

He's not alone. Portfolio managers of other equity income funds also seek relatively high and growing income for their shareholders, primarily by investing in equities, as well as appreciation.

The recession and consequent board actions on dividends -- they were cut or omitted on 437 occasions in 1991 -- haven't been the managers' only concern in the recent past.

Ironically, the bull market also has given them problems -- albeit, of a happier sort. As stock prices have soared to new highs, the ratios of dividends to prices have fallen. Thus, for instance, the average yield on the stocks in the S&P 500 index is now down to 3 percent, compared with 5 percent or more at bear market bottoms.

To cope with these conditions, managers of equity income funds have pursued a variety of strategies, as is illustrated by examples from the group's leading performers of the last five years. If the concept of an equity income fund appeals to you, you'll want to understand the differences so that you'll have a better idea of the type of equity income fund you'd wish to consider.

To boost income, all of the five-year leaders are invested in convertible and non-convertible bonds and preferred stocks in addition to common stocks and cash equivalents. Only a few others, such as four-year-old Vanguard Equity Income Fund, are concentrated in common stocks plus cash and able nonetheless to produce above-S&P 500 yields.

The Price entry is one of the funds that are more than 70 percent in high-yield common stocks and round out their portfolios with fixed-income securities to help them pay above-average dividends. Mr. Rogers recently added energy, telephone, and pharmaceutical issues that he saw as attractive and sold shares on which the fund had large gains.

Financial Industrial Income Fund is similarly allocated among asset classes, but its equities have been chosen more for their growth potential. This paid off in performance in recent years, when growth stocks beat others, but inhibited the yield. Management now wants to lift the yield, mainly through selection of stocks such as utilities.

The fund remains overweighted in bank and other financial services stocks, according to assistant manager Philip Dubuque, because of the benefits that they're expected to enjoy with economic recovery.

Flag Investors Telephone Income Fund has even more of its assets in common stocks. Telephone industry stocks, which are diversified among local (regional Bell and independent), long distance and foreign companies, constitute more than 65 percent of the portfolio. The industry's share has been as high as 85 percent, and Bruce E. Behrens of Alex. Brown Investment Management, the fund's president, says he's building up the phone portion again.

Lindner Dividend Fund is at the opposite extreme. Eric Ryback, who has run it for 10 years, has only around 10 percent of the fund in common stocks but about 50 percent in preferred stocks. He doesn't own more common stocks because "the yields aren't attractive enough."

The fund's yield of more than 8 percent is the group's highest, but Mr. Ryback thinks "we've capped out" as long as interest rates stay about where they are. He's now determined to put a higher emphasis on growth -- while trying to maintain his high yield -- by buying "overlooked" convertible securities that he regards undervalued.

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