In volatile markets, income investors must choose: high returns or regular payouts.

As 2022 nears its midpoint with rising concerns about recession and inflation, stocks with higher yields have performed relatively better than those with faster rising payouts.

But Donald Kilbride, the $53 billion portfolio manager

Pioneering dividend growth

fund (ticker: VDIGX), which focuses on increasing payouts, not yield, takes this into account.

As of June 21, the Vanguard fund’s total return this year was minus 12.5%. Although it beat the


decline of about 22%, it is lagging behind

iShares Core High Dividend

the small gain of 0.2% of the listed index fund (HDV) and the

Vanguard High Dividend Yield

ETF (VYM) return of minus 8.8%.

“Our perspective tends to be very, very long term,” Kilbride said. Barrons. “It’s all about composition.”

Kilbride, who is also a portfolio manager at Wellington Management, has played a key role in managing the Vanguard fund since 2006. The portfolio’s 15-year annual return was recently 9.25%, beating the Morningstar category average of 7.46% and the result of the S&P 500 of 8.5. %. The fund holds 42 stocks.

Kilbride has always looked for stocks that increase their dividends “by a good cushion” above the rate of inflation. This has become trickier lately as inflation has soared, most recently to 8.6% for the 12 months ending May 31.

Still, he isn’t worried about how the market has shifted to higher-yielding stocks. “We’re trying to find underlying dividend growth,” says Kilbride. “Yield has little, if anything, to do with our process.”

Some funds that focus on higher-yielding stocks were helped by the surge in energy stocks, which made strong gains on rising crude oil and natural gas prices. The dividend yield for energy stocks in the S&P 500 was recently around 3.6%, compared to 1.7% for the broader index, according to FactSet.

Through the June 22 close, energy stocks on the S&P 500 had returned more than 30% this year, the only one of the index’s 11 sectors to post a positive return over that period.

Lan Tran, associate passive strategies analyst at Morningstar, points out that “dividend growth funds have [underweighted] energy versus high yield funds.

It has certainly been a headwind for dividend growth funds this year. “Dividend growth funds have been underweight energy due to either tighter dividend history criteria or fundamental screens,” Tran adds.

Peter Fisher, a portfolio manager at Wellington Management who works closely with Kilbride, points out that sectors like energy have done well in part due to inflation concerns. Energy is often seen as a hedge against inflation.

Fisher characterizes energy as “more of a value sector”, adding that it differs from the “types of stable, quality producers that we tend to have”.

As of March 31, the fund’s top holdings included

UnitedHealth Group

(UNH), which gives 1.3%;

Johnson & Johnson

(JNJ), 2.6%;


(CL), 2.4%; and

Coca Cola

(KO), 2.9%.

There’s no doubt that the market’s tilt toward value has helped higher-yield-oriented dividend funds, especially funds with decent energy weightings. Since June 21, the

Russell 1000 Value Index

had returned around minus 13% this year, well above the corresponding growth index of 29%.

ETF / Symbol Cumulative return since the beginning of the year AUM (bil) Expense ratio
iShares Core High Dividend / HDV 0.2% $12.6 0.08%
Vanguard High Dividend Yield / VYM -8.8 42.4 0.06
iShares Core Dividend Growth / DGRO -14.9 21.4 0.08
Vanguard/VIG Dividend Appreciation -17.2 58.8 0.06

Note: Data as of June 21, AUM=assets under management

Source: Morning Star

At the end of last month, the Vanguard High Dividend Yield ETF had a weighting of around 10% in energy, the fourth largest among its various sectors. As of June 21, energy was the second largest sector weighting for the iShares Core High Dividend ETF at nearly 19%.

Rising inflation – and its impact on corporate performance – is another consideration for dividend investors when picking stocks.

“To win in this game, you have to be able to set prices,” says Kilbride, who cites some key pillars of pricing power: innovative products, strong brands and the ability to sell value, but not necessarily very expensive. , components to companies.

One of its holdings is UnitedHealth, “which has some exposure to the economy,” he says. UnitedHealth has large businesses that include health insurance, drug benefit management and healthcare analytics used by other companies, according to Morningstar.

“Health care is exposed to a steep long-term demand curve,” says Kilbride. “Given demographics and innovation, we will only consume more healthcare globally.”

The stock’s recent return of 1.3% is quite modest, but it has been growing at a double-digit pace.

Another holding in the fund is consumer products company Colgate-Palmolive. “We’re going to brush our teeth whether there’s a recession or not,” Fisher says. Core businesses, he adds, “by their very nature are very, very resilient to an economic downturn.”

Colgate-Palmolive has seen fairly small but steady dividend increases in recent years. Last month, the company paid a quarterly outflow of 47 cents per share, down from 45 cents previously.

Taking a step back, Kilbride points out that high-yielding stocks can be risky, despite their recent relative outperformance. “Sometimes the market just doesn’t have confidence in that dividend,” he says.

This is especially true if the stock price has fallen, pushing up the yield before a dividend cut or suspension.

Dividend fund managers are approaching this volatile environment in a variety of ways. For example, John Kornitzer, a longtime co-manager of the $455 million

Buffalo Flexible Income

fund (BUFBX), reduced on certain energy stocks such as


(HES), which became too expensive for him. He used this proceeds to invest in sectors with more attractive valuations, such as pharmaceuticals and banks. A stock he added was a regional bank

Citizens Financial Group

(CFG), which recently lost 4.3%.

Looking ahead, Kornitzer says he expects the companies to face some grilling on upcoming earnings calls about price increases, how business is holding up and whether margins are tightening, which affects the dividend policy. “A lot of questions will be answered in the second quarter results,” he said.

This also applies to dividend investors.

Write to Lawrence C. Strauss at [email protected]

Robert D. Coleman