To diversify his portfolio while including the best combination of growth and yield, Peris aims to hold a mix of stocks with different yields. At the high end of the spectrum are stocks that yield 6% to 8% and typically increase the dividend at an annual rate of 2% to 4%. The high-yielding holdings include many telecoms, such as AT&T (T) and Verizon (VZ). At the lower end are stocks that yield 3% to 5% and increase the dividend at a rate of 5% or more. Low-yielding holdings include Procter & Gamble (PG) and Coca-Cola (KO). By holding the diverse collection, Peris aims to maintain a portfolio that yields 5% and has a dividend growth rate of about 5%.
The fund has big stakes in consumer staples and health care. But there are no holdings at all in technology, industrials and basic materials. Many stocks in those sectors pay little or no dividends.
In some instances, the stocks do pay dividends, but the businesses are highly cyclical. Peris worries that such companies could fare poorly in recessions. "Materials and technology companies can be too cyclical and volatile to meet our needs," he says.
To ensure reliable performance, he looks for companies with strong balance sheets and long track records for raising dividends. If Peris spots a stock that seems a bit more appealing than a current holding, he won't necessarily trade. While many portfolio managers trade rapidly to take advantage of temporary price moves, the Federated manager aims to hold strong stocks for years.Peris only owns companies that are dedicated to using much of their cash for dividends. In his book, he rails against managements that keep cash for empire building instead of paying investors. Peris especially shuns companies that spend heavily on acquisitions or buying back shares. Such strategies often backfire. He lost interest in Pfizer (PFE) in 2009 when the company cut its dividend to pay for an acquisition. "Very few large acquisitions succeed," he says. "Big deals produce fees for Wall Street investment bankers, but the mergers don't result in much dividend income for Main Street investors."