A No-Load Clone of a Top-Notch Fund


A No-Load Clone of a Top-Notch Fund

With Harbor Large Cap Value, investors can get the same winning strategy Rick Helm uses for Cohen & Steers Dividend Value fund -- but without the hefty sales load.

Here's one straightforward stock-picking strategy that stands the test of time: dividend growth.

When Ned Davis Research calculated the returns of stocks in Standard & Poors 500-stock index from January 1972 through August 2007, dividend growers won hands down. This group of stocks returned an annualized 10.9%, good enough to produce a 40-fold gain over the span. The S&P 500, by comparison, returned an annualized 8.5% during the same period; non-dividend payers earned a pathetic 2.4% annualized.

One of the best dividend-growth practitioners in the mutual fund business is Rick Helm of Cohen & Steers. His Cohen & Steers Dividend Value (symbol DVFAX) returned 17.5% annualized from inception in August 2005 through October 3, 2007, an average of 3.6 percentage points per year better than the S&P 500. (Helm plied the same dividend-growth strategy for years at the money-management unit of Washington Mutual, the savings and loan company, before joining Cohen & Steers in 2005.)

Dividend Value hits investors with a 4.5% front-end sales load, but you can take advantage of Helm's skills through a no-load clone, Harbor Large Cap Value (HILVX). After taking over as sub-adviser in June 2007, Helm within a week had totally remade the fund in Dividend Value's image.


Here's why Helm likes companies that raise their dividends consistently. He says it demonstrates management's confidence in the company's business model and future cash flows and signals confidence in the outlook.

Unlike share buy-backs, which may be one-time events, steady growth in dividend distributions encourages companies to be more careful with their cash and shows commitment to shareholders. After all, you need to generate steady cash flows to fund a quarterly dividend commitment. "There's a great deal of information being communicated by companies when they raise their dividends," says Seattle-based Helm.

He uses a three-step process to fill his portfolio, which currently holds 80 stocks. First, he identifies what he considers the highest-quality companies, with the soundest business models, in each sector.

Then he analyzes these companies for their dividend profiles. He not only seeks steady dividend growth, but also prefers companies with relatively low payout ratios (dividends as a percentage of earnings; companies with low payout ratios have plenty of room to boost dividends) that are reinvesting enough money to expand their businesses. For instance, a company that yields 10% but grows only 1% a year would not make the cut. An ideal investment might be a company that has completed an aggressive capital-investment program and is scaling back capital expenditures, which is likely to generate more-abundant cash flow.


Finally, he studies stock valuations to ensure that he doesn't overpay for his dividend growers.

Helm's largest holding is Aflac (AFL), a U.S.-based niche insurance company with a large franchise in Japan that has compounded dividends by an impressive 28% a year for five years. He also holds Wells Fargo (WFC), which has boosted distributions 16% annualized for five years, and Nike (NKE), which has raised payouts 25% a year during the same stretch.

One reason a dividend-growth strategy performs over the long term is that companies of quality and consistency tend to hold up well in bear markets. "Our strategy has done well in down, choppy and rising markets," says Helm. However, he says, the strategy will lag in "frothy markets, where quality doesn't hold up."