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Performance in many dividend strategies has suffered in the past year or two as investors worry over rising rates and chase high-flying growth stories. Still, over the long-term, dividends play an important role in returns, accounting for nearly 77% of the total return of the S&P/TSX Composite for the 10 years ending May 31. One of my favourite dividend funds is the Fidelity Dividend Fund helmed by lead managers Geoff Stein and David Wolf.
It is set up like a “fund of funds,” with sub-managers Don Newman running the dividend equity sleeve while Catriona Martin and Sri Tella look after the fixed-income side. The neutral mix of the fund is 95% equities and 5% bonds. The asset mix is fairly static.
Equities are managed using a fundamental, bottom-up “growth at a reasonable price” approach, as managers seek out companies that trade at a reasonable price and have the potential to not only maintain, but also grow, their dividends. Common characteristics include strong free cash flow generation and improving earnings power. Quality of management is also considered. The fund’s sector mix has heavy exposure to financial services and utilities.
The fixed-income sleeve has a core-focused approach that blends top-down macro analysis with bottom-up security selection.
Performance over the past year has lagged, with a 12-month return of 5.9% to Feb. 28, compared with 6.9% for the S&P/TSX Composite Index (Total Return). One reason for the underperformance is the high cash balance, which at Feb. 28 sat at a 27% weighting.
Value and interest-sensitive names have lagged, and market valuations remain high, resulting in a more conservative positioning for the fund. The high cash weight has been a drag on performance but will buffer the fund against volatility and provide trading flexibility when valuations become more reasonable.
The fund tends to be less volatile than the index or its peers, resulting in better-than-average risk-adjusted returns over the long term. Despite its recent troubles, the fund remains a solid offering in the Canadian dividend space.
Fidelity Dividend Fund
Fund company: Fidelity Investments Canada
Fund type: Canadian Dividend & Equity Income
FundGrade rating: C (February)
Style: Large Cap Value
Risk level: Medium
Load status: Optional
RRSP/RRIF suitability: Excellent
Managers: Geoff Stein since April 2011; David Wolf since March 2014
MER: 2.09% Series B
Fund Code: FID221 (Front-end load)
Minimum Investment: $500
Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products.
Notes and Disclaimer
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Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.
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