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TheStreet Open House

Blue-Chip Dividend Stocks: Buy Like SVAAX

Stocks in this article: SVAAX

NEW YORK ( TheStreet) -- While most funds have struggled lately, Federated Strategic Value Dividend (SVAAX) has soared. Federated returned 11.9% in the past year, topping 99% of large value funds and surpassing the S&P 500 by 11 percentage points, according to Morningstar. The winning streak occurred because Federated focuses on one of the market's hottest segments: blue-chip dividend stocks. The portfolio is full of such familiar names as H.J. Heinz (HNZ) and Johnson & Johnson (JNJ), rock-solid companies that have appealed to nervous investors.

Since blue chips move in and out of favor, Federated is not likely to excel every year. But the fund makes an intriguing pick because it has a track record for limiting losses during difficult times and delivering decent results in bull markets.

Portfolio manager Daniel Peris follows a disciplined strategy that he describes in a recent book, The Strategic Dividend Investor. The book makes the case for buying stocks that have yields ranging from about 3% to 8%.

"We are trying to offer our clients consistent income that will grow modestly over time," Peris says.

In his book, Peris cites research on the performance of big dividend stocks from 1969 through 2009. He divides the universe into quarters based on dividend yields. Stocks in the lowest-yielding quartile returned 9.8% annually, while shares in the top-yielding group returned 12.2%. The best results went to stocks in the second-highest quartile, which returned 12.8%. Stocks with no dividends trailed far behind, returning 8.2%.

Peris says that high-yielding stocks excel because the dividends help to cushion results in downturns, and the fat payouts contribute to strong total returns over the long term. But stocks with the very highest yields aren't necessarily the best choices. A double-digit yield can be a sign that investors are fleeing a stock because the company is on shaky ground.

Peris likes stocks that are increasing dividends regularly. According to research, stocks with fast-growing dividends tend to outdo slow growers. His favorite stocks have high dividends and fast growth. But few stocks fit the ideal description. Some stocks with high dividends tend to be slow growers, while stocks with faster growth often pay lower dividends.

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