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Fund Watch

A New Dividend Fund Joins the Kiplinger 25

Vanguard Equity-Income benefits from two stock-picking teams with quite different strategies.

Just eight months after we added American Century Equity-Income to the Kiplinger 25, the fund has closed to new investors. Existing shareholders can continue to buy shares, and they should consider doing so. But we believe that funds in the Kiplinger 25 should be available to all. So when a fund shuts, we replace it. Please welcome Vanguard Equity-Income (symbol VEIPX

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Two outfits run the fund, which, as its name suggests, aims to generate income and growth. Wellington Management’s Michael Reckmeyer steers two-thirds of Equity-Income’s $23 billion in assets; Jim Stetler and Michael Roach, of Vanguard’s quantitative group, which uses computers to pick stocks, manage the rest. Both Reckmeyer and the quants home in on stocks in large, high-quality firms with above-average yields. At last word, the fund held 217 stocks, led by Microsoft, Johnson & Johnson and General Electric.

The managers employ decidedly different approaches to picking stocks. Reckmeyer favors large firms with above-average dividend yields, superior growth prospects, and an ability and willingness to raise their payouts over time. “We focus on good-quality companies,” he says. But he likes to buy when the stocks are out of favor and trading at “distressed” valuations.

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Stetler and Roach use computers to find attractive opportunities among stocks in the fund’s benchmark, a FTSE index that consists of the highest-yielding U.S. stocks, excluding real estate investment trusts. The models highlight companies with strong balance sheets, consistent earnings growth and managers who make shareholder-oriented decisions (such as raising dividends), among other things. Those factors help to “identify the outperformers of the future,” says Stetler. A valuation filter ensures that Stetler and Roach buy a stock only if it is reasonably valued relative to its industry peers.

From August 2007, when Reckmeyer and the quants began to work together, through October 31, 2016, Equity-Income returned 7.2% annualized, and Standard & Poor’s 500-stock index earned 6.7% per year. The fund yields 2.9%, compared with 2.2% for the index. Annual fees are 0.26%, about as low as they come for an actively managed fund.