| History shows, though, that over longer periods | | | | research. The search often begins on familiar |
| of time dividends have always been an essential | | | | terrain. Electric utilities, oil and gas companies, real |
| component of total return, regardless of which | | | | estate investment trusts and banks are classic |
| direction the market has headed. 2006 is another | | | | examples of sectors that have traditionally paid |
| strong year for dividends. For the third year in a | | | | generous dividends and increased them in order |
| row, a growing number of companies have either | | | | to make their stocks appealing to investors. |
| increased their dividends or begun paying | | | | Our firm continues to recommended equity |
| dividends. In addition, more investors are paying | | | | income funds to clients as core holdings in a |
| attention to the solid companies that are capable | | | | diversified portfolio, as a part of their college |
| of paying dividends. That is a big change from the | | | | savings plan or to produce reliable quarterly |
| late-1990s, when investors by and large shunned | | | | income in retirement. While these holdings have |
| yields and many companies refrained from paying | | | | delivered above average returns for years, it is |
| them, so that stock market yields in the U.S. | | | | important to remember that it is not the |
| plunged to unprecedented lows. History shows, | | | | objective of the funds to beat a stock market |
| though, that over longer periods of time dividends | | | | index such as the S&P 500. (The S&P |
| have always been an essential component of total | | | | 500 consists of 500 stocks representing major |
| return, regardless of which direction the market | | | | US industry sectors.) |
| has headed. Between 1926 and 2004, dividends | | | | It is the objective of the funds to provide an |
| accounted for roughly 40% of the average annual | | | | attractive long-term return by pursuing a |
| return of the U.S. stock market. | | | | conservative strategy focused on providing |
| Another impetus for the dividend resurgence, of | | | | above-average current income and growth of |
| course, has been the Jobs & Growth Tax | | | | dividends over the years. Although the majority |
| Relief Reconciliation Act of 2003, which lowered | | | | of assets have typically been held in U.S. based |
| the maximum tax rate on long-term capital gains | | | | companies, the funds have the flexibility to invest |
| and qualified dividends to 15%. With a more level | | | | anywhere in the world. In the past, the U.S. |
| playing field between the taxation of capital gains | | | | stocks provided some of the most reliable |
| and dividends, companies can more clearly decide | | | | dividend income in the world. Now, the U.S. is a |
| what allocation of capital is best for shareholders | | | | relatively paltry source of dividend income, and |
| over the long-term rather than what is more | | | | superior yields and dividend growth come from |
| tax-efficient. | | | | companies based in Europe and Asia. Many of |
| There are relatively few individual securities that | | | | these equity income funds feature low expenses, |
| provide a high current yield and grow their | | | | experienced managers, limited volatility and steady |
| dividends, so the challenge for portfolio managers | | | | long-term performance. |
| is to build a portfolio of companies that, as a | | | | (Review the prospectus before investing. Past |
| whole, meet both criteria. That requires in-depth, | | | | performance is no indication of future results. |
| company-by-company, and increasingly, global | | | | |