Dividend Stocks Return to Fore Amid Tumult

As debt woes in Europe roil U.S. markets, more investors are turning to dividend-paying stocks, says Daniel Peris, manager of the Federated Strategic Value Fund.
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PITTSBURGH (TheStreet) -- As debt woes in Europe roil U.S. markets, more investors are turning to dividend-paying stocks for stability, says Daniel Peris, manager of the Federated Strategic Value Fund (SVAAX) - Get Report.

The $991 million fund's biggest positions were

Bristol-Myers Squibb

(BMY) - Get Report

,

Royal Dutch Shell

(RDS.A)

,

BP

(BP) - Get Report

and

AT&T

(T) - Get Report

as of March 31. Those stocks have dividend yields of at least 5.7%, doubling the 2% average for the

S&P 500 Index

.

The fund, which has earned three stars from

Morningstar

(MORN) - Get Report

, has returned 15% during the past year. The fund has lost 0.6% annually during the past five years, beating half of its peers.

Welcome to

TheStreet's

Fund Manager Five Spot, where America's top mutual fund managers give their best stock picks and views on the market in a five-question format.

Why will total returns become popular with investors again?

Peris:

Total return is dominated by the dividend, both the dividend yield and dividend growth over time and that's how we manage this portfolio. After a 25-year period in which investors have really been moving away from dividends with interest rates and the rate of the risk-free alternative coming down, dividends really faded into the background. Well, we've reached rock bottom. Interest rates are at zero and the return from many near-term investments is close to zero.

Was the move away from dividends exacerbated by the tech boom?

Peris:

Absolutely. We've hit maturation in a number of sectors where it's time to realize that the risks of reinvestment are higher than simply returning cash to shareholders, primarily the dividend. Along with the decline in interest rates, I think the tech boom was certainly a part of it. It was also a big shift in our society. We had a big pendulum swing in favor of open markets and deregulation. We had a lot of investors, and not just the wealthy, enter into the stock market for the first time due to 401(k) changes and technological advances like electronic trading on the web. This propelled a lot of people into the stock market and led to a lot of trading, a lot of speculation.

How do you know when a dividend is safe?

Peris:

We try to answer the following question as best we can: "What is the ability and inclination of management to pay and increase the dividend over the next three to five years?" That involves the analysis of the business, items like their capital needs and where they are in their particular business cycle. And we really study a company's management as to their capital allocation priorities.

What sectors are you finding pay the healthiest payouts right now?

Peris:

If you look at the S&P 500, it only has a 3% weight in the telecom sector. If you look at the aggregate dividend opportunity from those same 500 companies, about 9% of the dividends come from the telecom sector. So we go where the dividends are. We go to securities and businesses where the cash is. Telecoms and consumer staples are our two largest sectors across our portfolios.

How do you know when a dividend-paying company has lost its way?

Peris:

The yield itself communicates a tremendous amount of information. A security with a 1% or 2% yield basically is communicating today that investors view it as a growth vehicle. The cash returns from that investment are miniscule. It's just not worth it. We shy away from low-yielding sectors because the risks are perceived to be great and the cash returns are low. At the other extreme, we don't like excessively high yields unless we feel very certain that the company can fund that dividend. We let the market in many ways do our heavy lifting when we make that decision.

--

Reported by Gregg Greenberg in New York

.

Before joining TheStreet.com, Gregg Greenberg was a writer and segment producer for CNBC's Closing Bell. He previously worked at FleetBoston and Lehman Brothers in their Private Client Services divisions, covering high net-worth individuals and midsize hedge funds. Greenberg attended New York University's School of Business and Economic Reporting. He also has an M.B.A. from Cornell University's Johnson School of Business, and a B.A. in history from Amherst College.