Unit investment trusts have their pros and cons but lately investors have been seeing a decided upside in a dividend strategy portfolio.
The High 50 Dividend Strategy Portfolio, offered by Advisors Asset Management, in Monument, Colo., has seen its assets jump from $276 million, 10 months ago, to more than $700 million now.
“What makes this different from other dividend strategies is that it’s extremely well diversified across size, style and sector,” said Mike Boyle, portfolio manager with AAM.
UITs typically invest in a smaller portfolio of diversified securities than do mutual funds. And unlike mutual funds, they mature at some point, at which time investors might have to pay an additional sales charge to jump back in to a similar UIT.
But UITs can beat actively managed mutual funds at the tax game since they are mostly static. And the lack of buying and selling means no transaction costs and no bid/ask spreads.
That competitive tax-and-fee structure is helping to drive interest in the High 50 portfolio, says Boyle.
“People want to more of the dividend, and because UITs have very low annual expenses, it allows you to keep a little more of the income,” Boyle said, adding that the portfolio yields about 5%.
Annual expenses in AAM’s product are between 25 and 35 basis points, which is half the cost or less of similar portfolios in mutual fund form, he said
Dividend-stock investing is a hot trend this year overall. A big reason is that amid all the uncertainty about the economy and the markets, U.S. corporations are still sitting on historic levels of cash.
“Dividends are seen as pretty safe, and there’s a good chance they’re going to increase,” Boyle said.
Indeed, Standard & Poor’s reported that 444 companies boosted their dividends in the second quarter, compared with just 21 that decreased their dividends. It’s not difficult to see why the High 50 Dividend Strategy Portfolio has garnered more than $220 million of assets this year alone.
The portfolio does have a recurring cost that mutual funds don’t, though -- at least if you want to stay invested for more than its 15-month maturity. Investors pay a commission of 2.95%; when they roll their money into a new UIT at maturity, they pay another 1.95% commission. There’s a fee-based route as well, in which investors pay net asset value plus 60 basis points.
AAM’s portfolio was launched in June of 2003. Its cumulative return since then is 57.52%, net of all fees and expenses. The S&P 500 over the same period has returned 51.45%.
The portfolio is made up of 50 stocks winnowed down from 7,000 companies using a proprietary dividend-oriented strategy. Based on its investment criteria, AAM selects the five highest dividend-yielding stocks in the 10 sectors. The resulting portfolio is weighted approximately 2% per stock and 10% per sector to help minimize risk.
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