Fund Managers' Top 10 Income Stocks

THE INCOME INVESTOR: Morningstar calls the best performing US fund managers the Ultimate Stock Pickers. We reveal their top 10 stocks which pay a dividend

Greggory Warren, CFA 18 March, 2014 | 11:10AM
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While most of our Ultimate Stock-Pickers are not known for being equity-income investors, the allure of dividend-paying stocks has not gone unnoticed by our top managers, especially with the yield on bonds still at historically low levels and the rally in the equity markets increasing the need to find higher-quality businesses that can be held for longer periods of time. It has been our long-standing view that stocks yielding more than the benchmark index, but which operate in stable industries, where there is less uncertainty surrounding their future cash flows, are more likely to offer downside protection for investors, and focus almost exclusively on those kind of names whenever we look at the dividend-paying stocks held in the portfolios of our Ultimate Stock-Pickers.

Part of our Ultimate Stock-Pickers process involves compiling a list of more than 500 different dividend-paying stocks each time that we run the data for our top managers. We then use this list to hone in on those stocks that we think not only have competitive advantages that should allow them to generate the cash flows that they'll need to maintain their dividends longer term, but be able to do so with far less uncertainty.

We accomplish this by screening for holdings that are widely held, are yielding more than the S&P 500, represent firms with Wide or Narrow economic moats, and have uncertainty ratings of either Low or Medium. Then, we create two tables, one reflecting the top 10 dividend-yielding stocks of our Ultimate Stock-Pickers, and the other representing stocks that are paying dividends in excess of the S&P 500 that are also widely held by our top managers. In our view, finding stocks that are yielding more than the benchmark index, but which operate in stable industries, where there is less uncertainty surrounding their future cash flows, should offer some downside protection for. We note that our dividend yield calculations in each of these tables is based on regular dividends that have been declared over the past 12 months, and do not include the impact of any special dividends that may have been paid out during that time.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Greggory Warren, CFA  Greggory Warren, CFA, is a senior stock analyst with Morningstar.