Jill Evans
Alpine Dynamic Dividend Fund
by Marla Brill
MFI Publisher
Although dividends have taken a back
seat to the growth component of stocks in recent years, Jill Evans thinks that a
more subdued market environment and juicier payouts by companies will increase
their appeal.
"Historically, over half of the stock
market's returns have come from dividends," says the manager of the Alpine
Dynamic Dividend Fund, which ended 2004 as Lipper's top-performing equity income
mutual fund for the year. "I believe we are moving toward that historical norm
again."
Despite Evans's forecast, the new era of
dividend investing that some predicted after the tax on qualified dividends
dropped to 15 percent has only partially materialized. Even after a surge of
dividend boosts by companies over the past two years dividend payments still
represent less than 2 percent of the value of the Standard & Poor's 500 Index,
so investors still need a healthy dose of growth to beat low-single digit
returns. And while dividend-paying stocks outperformed non-dividend payers last
year their dominance prevailed only until September, when investor confidence
sagged and a dividend cushion looked appealing. As optimism crept back
into the market toward the end of the year, non-dividend paying growth stocks
outperformed.
Evans thinks the stage this year is
being set for modest stock market returns, and that bodes well for defensive
dividend-paying stocks. "When the stock market is growing 20 percent in a year,
no one wants to hear about dividends," she says. "But with investors looking at
the possibility of single digit returns in 2005 and 2006, dividends are looking
a lot more attractive."
Industry fundamentals are also strong,
and Evans believes that many traditional dividend-yielding companies like
industrials, materials, consumer staples, and utilities will benefit from a
weaker dollar, continued penetration of global markets, improved balance sheets
and operational leverage following years of restructuring. Strong free cash flow
in 2005 will add to the record levels of cash already on corporate balance
sheets. Although some companies will use cash to finance acquisitions or other
growth opportunities, a substantial number will finance share buybacks or
increase dividend payouts. Many of them are well-positioned to do so. According
to Standard & Poor's, companies in the S&P 500 Index currently pass on 34
percent of their earnings in the form of dividends, versus an average payout of
54 percent historically.
"A Bowl Of Stew"
Investors who agree with Evans's bullish
view for dividend-paying stocks should be aware that this fund's formula for
mining them is very different from the vast majority of its equity income
competitors. Evans looks beyond the usual roster of steady cash generators in
the pharmaceutical, utility, and financial sectors to ferret out less obvious
choices that are declaring an unanticipated special dividend, or even those
paying them for the first time. She also moves into lesser-known small company
stocks with fat yields. To capture as much income as possible, she will trade
around a stock's ex-dividend date while holding the security long enough for its
dividends to qualify for reduced federal tax rates.
"I look at the portfolio like a bowl of
stew," says Evans. "The large company steady dividend payers are the base of the
stew, the meat and potatoes. The small caps, special situations, and trading
strategy are the vegetables and spices."
The Alpine Dynamic Dividend Fund
portfolio is divided into three different investment strategies. The "dividend
capture" side contains consistent, high yielding stocks or special situations
where large cash balances are being returned to shareholders in the form of
one-time special dividends. To enhance returns, Evans may rotate a portion of
the holdings after the 61-day ownership period required to obtain the 15 percent
dividend tax rate. The primary goal is generating yield rather than capital
appreciation, and Evans estimates that 2/3 of the fund's yield comes from this
side of the fund.
The core growth and income section
contains stocks that have slightly lower dividend yields and predictable
earnings streams plus a catalyst for capital appreciation and potential dividend
increases. "These are the kinds of traditional stocks you'd see in many growth
and income portfolios," says Evans. "They have the potential to grow earnings 10
percent each year and to raise dividends at about the same pace. With capital
appreciation, we're looking for about a 10 percent return from this side of the
portfolio."
In addition to familiar large company
names in the pharmaceutical and financial sectors, the growth and income section
also contains a number of small-and mid-cap stocks. Rocky Mountain Chocolate
Factory, which went public in 1986 and has a $72 million market capitalization,
had a 4 percent yield when Evans purchased the stock about a year ago. After a
rise in the stock price from $8 to $17 over that period, the yield is down to a
little under 2 percent. "This company should grow earnings at a rate of 15
percent to 20 percent a year, and management is committed to raising the
dividend as earnings grow," says Evans. Another small cap cash generator,
Meridian Bioscience, has a $240 million market capitalization and the potential
to grow earnings at a rate of 15 percent to 20 percent a year. The company makes
tests that instantly detect strep throat, influenza, and other illnesses.
Finally, the "value with a catalyst"
side contains undervalued or turnaround situations where high dividend yields
are a product of depressed earnings that Evans believes are poised to recover.
Basset Furniture and Dow Chemical fall into this category.
The fund's investment strategy has
produced some of the beefiest dividend payouts in the industry. Based on a
trailing 12-month dividend of $1.15 and a net asset value of $12.78 on December
31, the fund's yield in 2004 clocked in at nine percent. About 96.5 percent of
dividends distributed to shareholders qualified for the 15 percent tax rate.
This year Evans is targeting an
annualized "floor" yield of five to six percent, although she says it could go
higher if a lot of companies in the portfolio make unanticipated dividend
announcements. Top fund holdings that declared special dividends last year
include oil tanker company Frontline, Regal Entertainment Group, and Microsoft.
A recent purchase, oil transportation services company General Maritime,
announced plans in late January to initiate quarterly dividends beginning in
April. "Oil tanker companies like General Maritime and Frontline are huge cash
generators," says Evans.
The fund distributes dividends every
month, rather than every quarter. The practice answers the call from
shareholders who want frequent payouts, but could complicate record keeping for
taxable investors. Those investors may also want to keep an eye on a trading
strategy that produces a portfolio turnover rate of nearly 200 percent. Although
Evans says that she's trying to stay around that threshold, the prospectus warns
that "the annual portfolio turnover rate of the Fund may exceed 200 percent."
Thus far, tax loss harvesting and other tax management strategies have been
effective in helping minimize capital gains distributions. In 2004, the fund
distributed $.24 a share in short-term gains and $.04 in long-term gains.
Evans's view as an industry outsider
may help explain the fund's unorthodox approach. She joined Alpine Woods, a firm
headed by the father and son team of Stephen and Samuel Lieber, in May 2003.
Before that, she was the senior equity research analyst covering small and
mid-cap basic industries at JPMorgan Securities, where she had worked since
1988. She was also the global coordinator of the firm's passenger and freight
transportation sectors.
"My career as a sell-side research
analyst involved analyzing companies and forecasting earnings, and I had a lot
of experience with dividend-paying industrials," she says. "So a switch to the
buy side at a firm known for investing in income-producing stocks seemed like a
good fit."
Soon after she joined Alpine, President
Bush announced the dividend tax cut. "I looked at some databases and was shocked
to find that the vast majority of funds yielded no more than the S&P 500 Index,"
she says. "Here the government was making this change that was a huge windfall
for investors, but there was no way to capitalize on it in the universe of
mutual funds." Evans and the Liebers set out to change that with the launch of
the Alpine Dynamic Dividend Fund in September 2003.
The dividend tax cut that fueled the
fund's launch is set to expire in December 2008, but Evans remains hopeful that
won't happen. "If something has to go, I think it will be the capital gains tax
cut because it's viewed as a rich person's benefit," she says. "Dividends are
perceived as a benefit for the middle class. People are looking for an added
measure of safety and security from the stock market. I believe there will
be a secular shift to dividend-paying stocks with or without the 15 percent tax
rate."
Alpine Dynamic Dividend Fund
At-A-Glance
Manager: Jill Evans
Assets: $145 million
Top five holdings: Fidelity National
Financial, Microsoft, Iowa Telecomm Services, General Electric, Citizens
Communications Co.
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