NEW YORK - While growth stocks took center stage in 1995, high-dividend stocks will steal the show in 1996, according to William Rechter, portfolio manager of the $70 million Cowen Income & Growth Fund.
The fund is run by Cowen & Co., New York, which manages $1.6 billion for institutions and high-net-worth individuals.
In 1994, the lower yielding stocks in the Standard & Poor's 500 Stock Index outperformed the benchmark by as much as six and a half percentage points on a relative basis. Higher yielding stocks underperformed by as much as nine percentage points.
In 1995, as of Aug. 31, the story was the same with lower yielding stocks outperforming by as much as 13 percentage points and higher yielding stocks underperforming by as much as 8 percentage points.
"Yield investors were flying into a pretty severe headwind," Mr. Rechter said in an interview.
But that ended in the fourth quarter. The Income & Growth fund sharply lagged the S&P in the first nine months of 1995, earning 17.5% after adjusting for sales charges, compared with 29.7% for the S&P, but - thanks to a stellar fourth quarter - ended the year with an increase of 32%, despite having no technology holdings. The average general equity fund tracked by Lipper Analytical Services was up 31.11% last year.
"Things appear to be turning with concerns over technology (stock) valuations, the Dow at (its high) level and the economic outlook," he said.
Mr. Rechter said investors have lost sight of the fact that about 45% of the average 11% annual return in stocks over the past 70 years has come from dividends. Instead, they get excited by corporate share repurchases, which contribute less to price gains.
"Most people have forgotten how important income is....People have come to the conclusion that dividends are dead. We've taken very strong exception to that.
"The correlation between announced share repurchases and price appreciation is limited....In our view when a company pays a dividend and raises the dividend, it's a real vote of confidence in the company's future."
Because high-dividend stocks ensure cash is coming into a portfolio in both good and bad markets, such portfolios tend to be far less volatile than growth stock portfolios with a beta of 0.7, representing about two-thirds the risk of the S&P 500, he said.
Mr. Rechter's strategy holds an investible universe of 100 to 200 stocks from 7,500 based on such factors as dividend yields, dividend payout ratios as a percentage of cash flow and historic dividend and cash flow growth. From that universe, he chooses only about 30 names and equally weights them. Turnover is a low 35%.
His sell discipline is driven by yield. The minimum is 4%. "We always sell at a 3.5% yield," he said. The average yield on S&P 500 stocks is a historically low 2.4%; his portfolio's average yield is 4.9%, "almost equivalent to the yield on money market funds," he said.
Half of the portfolio is core holdings that he rarely trades. The rest is in "contrary" plays, which have lower initial yields but more rapid dividend and cash flow growth.
Among contrary names, he is just starting to look at retailers. So far he's added J.C. Penney Co. Inc. and Tambrands.
