Home' Trinidad and Tobago Guardian : January 10th 2015 Contents JANUARY 10 • 2016 www.guardian.co.tt SUNDAY BUSINESS GUARDIAN
OF MUTUAL INTEREST | SBG11
The dividend gravy train is slowing down, threatening an
important source of income for investors at a time when stocks
are going nowhere.
About 500 companies cut or halted their dividends last
year, the highest tally since the economy was crawling out of
the Great Recession in 2009. Not only that, other companies
got more reluctant to raise their payouts to shareholders,
according to numbers released Tuesday by S&P Dow Jones
Indices. The number of dividend increases was the lowest in
Dividends, the share of profits that some companies distribute
to investors, have been increasingly important because bonds
still offer relatively low interest payments and stock prices
have been flat. For example, all of the 0.3 per cent return that
the largest mutual fund produced last year came from dividends.
Without the payouts, Vanguard s Total Stock Market Index
fund would have lost 1.6 per cent.
That s not to say dividends are dead. Companies paid out
US$38.7 billion more last year than in 2014. It s just that the
momentum has turned. Last year s growth was the weakest
in five years.
In the earlier years of this economic recovery, corporate
profits were jumping, and companies were racing to dole out
ever-bigger chunks of their cash hoards to shareholders. Div-
idends got back in vogue after demonstrating their importance
during the "lost decade" of 2000-09, when the Standard &
Poor s 500 index dropped in price by 24 per cent. Dividends
cushioned the blow and left the index with a more modest
loss of nine per cent.
Dividend payouts grew so large in recent years---while bond
yields shrank---that many investors searching for income who
would have traditionally bought bonds moved instead to stocks.
But corporate profits hit a wall last year, and companies felt
the pressure to preserve their cash. Commodity producers
were the hardest hit, pummeled by the plummeting price of
oil and metals. Profits for exporters across other industries
eroded because of a strong dollar and still-tepid global econ-
Mining company Feeport-McMoRan has paid a dividend
in 12 of the last 13 years and sent out checks to shareholders
totaling US$2.3 billion in 2013, for example. But it s hurting
because of the slide in copper s price. In March, it slashed its
quarterly dividend to 5 cents from 31.25 cents. As losses con-
tinued to mount, it suspended its dividend last month as part
of a plan to cut spending.
The dividend doldrums are expected to continue. Howard
Silverblatt, senior index analyst at S&P Dow Jones Indices,
expects the growth in dividends to fall to the mid-single digits
in 2016, down from 10 per cent last year and a high of 18 per
cent in 2012.
AP's Stan Choe
It s tempting to look at which mutual
funds did best in 2015 and just invest
in those. Winners win, right? Not in
the investing world. It s tough for funds
to stay on top, and last year s winners
regularly turn into this year s losers.
Look at what happened to the handful of
index and actively managed mutual funds that
returned 40 per cent or more in 2014. Their
returns towered over the 14 per cent that a
Standard & Poor s 500 index fund produced.
But seven of the 10 went on to lose money
the following year. You would have had a
slightly better chance of making money in
2015 by picking a fund at random.
The figures dovetail with a raft of studies
that suggest investors should consider much
more than just past performance when choos-
It turns out that even when funds perform
well over long periods, compared with similar
funds, it doesn t mean they will continue to
A study released by Morningstar this week
looked at fund returns in 14 categories, going
back to 1996. It identified which high-yield
bond funds were in the top 20 per cent for
the five years through 2001, then checked to
see how they performed over the ensuing five
years against the funds that had been in the
bottom 20 per cent.
The researchers found only small differences
in ensuing success for the top and bottom
funds in most categories, as long as the time
frame was longer than a year.
"Even the best managers generally do not
consistently outperform," the researchers wrote
in their report. "Those who lack the patience
to stick with an active manager through mul-
tiyear rough patches may be better off in a
low-cost index fund."
S&P Dow Jones Indices, meanwhile, keeps
its own scorecard of how many mutual-fund
managers are able to stay in the top quartile
or even top half of their categories. Its verdict:
Of the 539 funds that ranked in the top half
of large-company funds in the year through
March 2011, 52 per cent repeated the feat the
following year. That s only slightly better than
a coin flip.
How many of those 539 funds were able to
remain in the top half for five consecutive
years? Less than five per cent.
The difficulty fund managers have in staying
on top serves as a reminder to resist the temp-
tation to hop from one fad to another. Investors
are notorious for chasing after whatever s per-
forming well and fleeing whatever s strug-
In other words, they often buy high and sell
low, and it s why investors often have worse
returns than the funds they invest in do.
The largest actively managed stock fund,
American Funds Growth Fund of America,
returned an annualised 7.2 per cent over the
decade through 2015, for example.
That s how much investors would have
made if they bought at the start of that decade
and then simply held it. But most investors
didn t do that.
Instead, many bought more shares when
performance was good and sold when per-
formance lagged. That means the average
investor in the fund got a 5.3 per cent annual
return over the decade, according to Morn-
Investors should also look to keep their
fund expenses low. A fund with high fees has
to perform much better just to match the
performance of a low-fee fund.
The good news is that investors seem to
be doing just that. Dollars have been flowing
into the funds with the lowest expenses for
years. Index funds, which have lower costs
because they try to simply match the market s
performance rather than beat it, have been
getting many of those dollars.
AP's Stan Choe
Dividends on the chopping block as profit growth peters out
Last year's fund
winners often go bad
Trader Jeffrey Vazquez works on the floor of the New York Stock Exchange, Thursday, January 7, 2016. US stocks are opening sharply lower as
worries intensify about China's economy and dropping oil prices. (AP)
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