Has the volatile stock market dragged down your favorite mutual funds? Check out $3.6 billion Invesco Dividend Income Fund (IAUTX). The fund has outperformed the broad market this year, going into Tuesday. That's no surprise. A volatile market is where this portfolio is expected to shine, says lead manager Pete Santoro.
"There are certain market periods where we think we can do better than other times," Santoro said. "And that would be periods of high volatility."
This year's market has certainly been volatile. The market in the form of the S&P 500 is down 18.95% this year. The fund is down less than one third as much, just 6.00%. The fund's large-cap value peer group is down 11.35%, says Morningstar Direct.
Volatile Markets
A key to the fund's relative strength is its focus on dividends. For one thing, dividends historically provide a big chunk of total return. "If you go back to the 1920s, dividends have been roughly 40% of the total return of the S&P 500," Santoro said.
Santoro expects investors to prioritize dividends more in the current and foreseeable market, which he calls "increasingly complex," and which requires navigating geopolitical tensions and inflation.
In addition, dividend paying stocks tend to have the financial strength to weather volatile markets. Investors often bid up prices for those survivors, Santoro says. "We do not focus on the highest dividend yields," he said. "We focus on the quality of companies that can grow their free cash flow, have strong balance sheets and can pay and grow their dividends."
Yield In A Volatile Market
Invesco Dividend Income Fund's trailing 12-month yield is 1.84% vs. 1.59% for SPDR S&P 500 ETF, which tracks the popular market benchmark.
The fund owned 69 holdings as of March 31. Seven have IBD Composite Ratings of 90 or higher.
A Composite Rating of 90 means that a stock is in the top 10% of all stocks on a number of technical and fundamental factors, including both price performance and earnings. Especially in a volatile market, watch for stocks that have 90-plus Composite Ratings and are forming bases or are in follow-on buy areas. That way, you spot the best-positioned stocks before they start big price runs. Look up a stock's Composite Rating at IBD Stock Checkup.
Twelve of those high Composite Rating stocks also have IBD SMR Ratings (which measures Sales, profit Margins and Return on equity) of A. So do an additional eight holdings.
The IBD's SMR Rating scale runs A through E. An A score ranks in the top 20% of all stocks based on those gauges.
In addition, drug maker Eli Lilly is on the IBD Leaderboard, which is IBD's curated list of leading stocks that stand out for their technical and fundamental prospects.
Lilly is part of the IBD 50, IBD's flagship screen of leading growth stocks that show strong relative price strength and top-notch fundamentals. UnitedHealth Group is also in the IBD 50.
Reasons To Like UnitedHealth
Why like UnitedHealth Group amid a volatile market? Its earnings per share are expected to grow 15% this year. They've grown four years in a row.
Santoro says his team, which includes managers Christopher McMeans, Caroline Le Feuvre and Craig Leopold, likes UnitedHealth Group as much for its technology as for its pharmacy and benefits management businesses. "The first thing that comes to mind for me is their incredible market breadth and deep data analytics capabilities," he said.
Data analytics will be as important in health care during the next decade as it was in the technology sector in the previous decade, Santoro says.
The Invesco Dividend Income team also likes UnitedHealth Group because of their exposure to the Medicare business. "Because of the aging demographic in the U.S., they're in the right spot at the right time," he added.
Adding A Spark To This Portfolio
Energy stocks have excelled despite a volatile market. Santoro and his team mates like integrated oil and gas major Chevron because it has resisted the temptation to spend more money on exploration and production. Instead, the energy giant is enjoying the payoff from prior years of investment. "(We like Chevron) management's strategy of lower capital intensity and lower capital expenditures and shifting more cash to shareholders via dividends and buybacks," Santoro said.
Chevron has also aimed some of its free cash flow toward strengthening its balance sheet and cutting debt, Santoro says.
Further, "the stock is discounting a lot lower oil price than we have today," Santoro said. "We like that cushion. And it gives us comfort that Chevron can still deliver healthy free cash flow if the price of the commodity drops."
The stock's dividend yield is 3.9%.
Driving Traffic Amid Volatile Market
McDonalds has beefed up its menu, stores and loyalty program while the volatile market turned many stocks rancid. Technology has been a factor, Santoro says. "Their great momentum in the U.S. is driven by the really sharp focus on its core menu," he said. "And we really like the digital gains from the relatively new loyalty program, which are incredible. They're using data to drive customer traffic. They're in the early stages of monetization of this loyalty program."
Also, McDonalds is winding down spending on upgrades to stores. "They were making stores a lot nicer," Santoro said. "We think they're at the tail end of that cap-ex cycle. And that drives better comps. In turn, that accelerates free cash flow. That, and a very good balance sheet and a commitment to shareholders with the dividend. That's the kind of company we're looking for."
McDonalds serves up a 2.2% dividend yield.
Dividend Income Fund By The Numbers
Over the trailing three years, Invesco Dividend Income Fund averaged an annual return of 5.92% vs. 10.37% for the S&P 500 and 7.50% for its large-cap value peer group.
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