Stock investors ran in place in 2011. The Standard & Poor’s 500 index is ending the year about where it started.
Invest in a stock mutual fund, and you likely ended up losing because of fee expenses. About three-quarters of the U.S. stock fund categories that Morningstar tracks closed out the calendar out with a loss.
That’s another knock for investors who are still stinging from their losses in the financial crisis of 2008. Although the market rebounded sharply beginning in March 2009, it’s still about 20 percent shy of its peak in late 2007.
Yet even in the gloom of 2011, there was a bright spot: dividend-paying stocks.
Across the board, the top-performing mutual fund categories were those that invested in dividend stocks, led by funds specializing in utilities stocks. Other top categories were funds that primarily invest in real estate investment trusts, the health care sector, and stocks of consumer goods firms that make necessities.
What’s more, large company stocks outperformed small- and mid-cap stocks. It’s the big companies, rather than the smaller ones, that were the most reliable dividend payers. Nearly 80 percent of S&P 500 companies make regular payouts.
The results are a complete reversal from 2010, when the top-performing funds specialized in small-cap stocks. Those stocks typically outperform larger ones when economic news turns positive, as it did in 2010, a year when stocks rose 13 percent.
But the economic recovery lost momentum in 2011, and investors bid up the prices of dividend stocks, while small-caps fell. "Practically anything paying a dividend was hot," Morningstar fund analyst David Kathman says.
Dividend-payers are typically well-established companies that share profits through quarterly payouts, rather than plowing the cash back into the company to fuel growth. Stocks of smaller companies can offer greater long-term potential, but are more vulnerable when the economy stumbles, or when fears like the European debt crisis send stocks tumbling.
Investors have been hard-pressed to find decent sources of investment income, which has made dividends more appealing. Consider that 10-year Treasury bonds yield around 1.9 percent. That’s less than half the yield of more than a dozen S&P 500 stocks. With interest rates low, bank accounts and savings options such as certificates of deposit provide even less income than Treasurys.
"People are looking to dividends for income, because they can’t get it from the other sources they normally rely on," Kathman said.
Here’s a look at average returns through last Wednesday for some notable stock fund categories, starting with the top four performers:
Utilities (9.7 percent) » These stocks tend to be stable performers in both a rising and falling market. It’s an outgrowth of the typically steady demand for electricity and natural gas. The average dividend yield of utilities stocks within the S&P 500 is 4.1 percent, about twice the average yield of the index. A handful of utilities sector funds delivered returns of around 20 percent in 2011, including Franklin Utilities (FKUTX), which earned top-rung gold honors from Morningstar under its new analyst ratings of funds. Some of the strongest-performing utilities, with gains of more than 30 percent including dividends, were big names like Progress Energy Inc. and Consolidated Edison Inc.
Real estate (6.9 percent) » Real estate investment trusts generate income from properties they own and often operate. They’re big dividend payers, because they’re required to distribute at least 90 percent of their taxable income to shareholders. Although the real estate market clearly isn’t back to where it was a few years ago, commercial real estate has fared better than residential real estate.
Health care (6.6 percent) » Uncertainty over President Barack Obama’s health care overhaul hurt health care stocks in 2009 and 2010, but that cloud lifted a bit in 2011. Drug maker Pfizer returned nearly 28 percent. One attraction was the stock’s dividend yield of 3.7 percent. Biotech stocks were among the year’s biggest winners. Biogen Idec shares jumped 64 percent, and a specialized fund, Fidelity Advisor Biotechnology (FBTAX), returned nearly 17 percent.
Consumer staples (4.5 percent) » These funds invest in stocks of companies that provide everyday essentials, from food to soap to trash bags, and typically pay dividends. Demand for these products is stable in good times and bad. Two of the standout stocks in 2011 are tobacco companies paying dividends of 3.9 percent or higher. Lorillard returned about 46 percent, and Philip Morris International 39 percent.
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