Russel Kinnel: The two most common mistakes fund investors make is buying based on yield or buying based on short-term performance. In both cases, it means you’re expecting recent results to continue without realizing that it takes a high-risk strategy to produce big yields and short-term returns.
To illustrate, I chose three funds that have some good ingredients including big yields but a strategy that just isn’t a good idea.
3 Mediocre Dividend Funds
- Janus Henderson Global Equity Income HFQAX
- Federated Hermes International Strategic Value Dividend IVFAX
- Gabelli Utilities GAUAX
Take Janus Henderson Global Equity Income. Its 12-month yield is nearly 8% because it follows a dividend capture strategy. The idea is to buy stocks that are about to pay big dividends and then sell them after that dividend has been paid. However, that dividend is priced into the stock and then out when they sell, so there’s no possible information advantage to management. What the process really does is move money from principal to income and that also means you get taxed for essentially taking your money back.
Federated Hermes International Strategic Value Dividend fund looks for dividend growth and produces a robust yield of about 4%. But the fund takes on big concentration risk by sectors and individual names. Thus, what could be a good defensive strategy just isn’t that reliable.
Finally, there is Gabelli Utilities fund. It boasts a 12% 12-month yield as it targets a set payout every month. Here’s the catch: Most of that money is return of capital in most years. So essentially they are taking your money and then giving it back to you, only now you have to pay taxes on it. In short, that yield is fool’s gold. With rising yields, the return of capital might decline a little bit, but it still looks like a bad bet.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.