Mutual Fund Provides Steady Returns
- Alan Lavine and Gail Liberman
We all need a keystone in our mutual fund portfolio-- a well-managed stock fund that delivers steadier returns than most other funds? Paul Herbert, analyst with Morningstar Inc., a Chicago-based research service, recommends the American Funds Investment Company of America Fund. This fund invests in large companies that pay dividends and will grow their dividend payments in the future. You will find stocks like Duke Energy and Dow Chemical in its holdings.
Most investors benefit more now from dividend paying stocks. The new tax bill reduces that tax on dividends to 15 percent retroactive to last May 1. Prior to that, you paid ordinary income tax on your dividend income.
The fund, run by a team of portfolio managers, invests in undervalued large company stocks. The fund typically buys bargain-priced stocks and growth stocks selling at reasonable prices. The fund can also move to cash, bonds and foreign securities when times are right.
Over the past 10 years, the fund has outperformed 89 percent of all funds that invest in undervalued large company stocks. This year, the fund is up about 11 percent.
"This fund makes a strong case for itself as a core holding for most investors," Herbert says. "The fundıs strategy has put it in a good place for most environments. Thanks to its dividend focus, it has held its own relative to other large cap value funds during the bear market."
Herbert, however, has some minor concerns about the fund. The fund can invest in cash, bonds and foreign securities. In most cases, that isnıt bad. But if you already have cash, bonds and foreign stock investments, you may be over-invested in these sectors.
The fund also has $47 billion in assets. So it cannot buy and sell stocks as nimbly as a smaller fund.
The fund owns a large number of stocks in several industries including information, services and manufacturing. It is 73 percent invested in stocks and the rest in bonds and cash. Ten percent of the fund assets are invested overseas.
The companies held by the fund grow earnings at about 16 percent annually. The fund sports a dividend yield of about 3 percent. The return on equity and return on assets of the fundıs holdings are higher than the overall market as measured by the S&P 500.
The largest holdings include Altria Group, Loweıs, Fannie Mae, Dow Chemical, Chevron Texaco, SBC Communication, Caterpillar and two Fannie Mae bonds.
Alan Lavine and Gail Liberman are husband and wife columnist and authors of The Complete Idiot's Guide To Making Money With Mutual Funds, (Alpha Books).
To read more columns, please visit the column archive.