3 'great' dividend-paying mutual funds

BY WARREN BOROSON

NEWJERSEYNEWSROOM

BOROSON ON MONEY

I bow to no one in my admiration for Morningstar, the publishing house in Chicago, and in my admiration for its leaders, Joe Mansueto and Don Phillips.

Morningstar revolutionized the world of investing by providing valuable information about mutual funds — and by actually rating them. Thus helping investors enormously in deciding which mutual funds to buy and which to ignore.

Before Morningstar came along, deciding which mutual funds to buy was darned hard. Should you concentrate on their one-year records? Their 10-year records? And what funds’ records should you compare a particular fund’s record with? The so-called Lipper statistics were confusing as heck.

Then Morningstar said let there be light, and there was light.

Even so, sometimes Morningstar pisses me off.

A recent issue features an article called “Three Great Funds for Dividend Yield.” It reported that today’s investors have been flocking to dividend-oriented funds — because yields elsewhere are low, and because such funds have proved relatively stable. (Only relatively. In 2008, that annus horribilis, the typical such fund lost 33 percent. The typical intermediate-term bond fund lost a mere 5.2 percent.)

Besides which, dividends matter. Over the past 80 years, the article states, dividends have contributed around 45 percent to the Standard & Poor’s 500’s return.

Then the article recommends three funds. One of them is Vanguard Wellesley Income (VWINX). A wonderful fund, especially for older people. Only 40% in stocks. Instead of buying an immediate annuity (or in addition to), I tell people, consider a fine income fund like Wellesley Income. Recently yielding 3.5 percent. Rated tops by Morningstar. 10-year annualized return: 6.83 percent a year. With no sales charges.

The article also recommends Vanguard Equity-Income (VWIPX). It’s much more heavily into stocks than Wellesley Income. Yield: 2.7 percent. 10-year annualized return: 5.45 percent. Also top-rated. And no load.

This fund is not all that similar to Wellesley Income. Its R-squared is different —R-squared is a number indicating how closely a fund follows its most similar index. Still, there’s enough of a similarity in their holdings to make me wish Morningstar had chosen a fund a bit more different.

The real clunker is the third choice: Allianz BJF Dividend Value A.

A load fund, for heaven’s sake! 5.5 percent of your investment flies right out the window! Rated only three stars! Performance: rated “below average”! An expense ratio of 1.06 percent! (The Vanguard funds’ expense ratios: Wellesley, 0.25, and Equity-Income, 0.31.) Ten-year annualized return: 5.31 percent.

How about T. Rowe Price Equity Income instead? No-load, four stars, expense ratio of 0.68 percent. It’s actually listed in the same issue as one of the Analyst Fund Favorites — while the Allianz fund is not.

I’d even have been happier if Morningstar had recommended still another Vanguard fund, Wellington, a five-star no-load fund yielding 2.9 percent and with an expense ratio of 0.25 percent. 10-year annualized return: 6.59 percent. Which would you yourself have preferred?

So, why did Morningstar recommend that mediocre Allianz fund instead?

To throw a bone to all the commission-based planners and brokers who subscribe to Morningstar, and to all the load fund families that cooperate with Morningstar? Perish the thought!

In any case, I’ll now get around to what really ticked me off about this article.

This particular sentence fragment right at the end: “…it’s valuation-conscious, yield-driven strategy has led to below-average volatility.”

Did you see that? “It’s” instead of “its”?

Years ago, I was so appalled by all the grammatical mistakes I found in Morningstar publications that I actually volunteered to proofread them — free of charge.

My good-hearted, generous offer was declined.

But no, I am not renewing my offer.