Fund Firm Seeks To Axe Dividend Rule
Is there no percentage in dividend investing anymore--even with the sudden resurgence of many “old-economy” stocks?
American Century Investments said Wednesday that it wants to drop a rule that forces two of its mutual funds to invest a percentage of assets in the shrinking pool of dividend-paying stocks.
The $8-billion American Century Select Fund, the Kansas City, Mo.-based company’s third-biggest equity offering, must put 80% of its assets in stocks of companies that pay regular dividends or otherwise produce income, said spokeswoman Beth Randolph. The $1.7-billion American Century Heritage Fund must invest 60% in such stocks.
Shareholders are expected to get proxy materials at the end of April, with a special meeting set for June 16. If approved, the policy will take effect June 19.
American Century instituted the requirement because it believed dividends were a strong indicator of rising profits. But in today’s market, “you can be a growing company and not be paying a dividend, so that the number of dividend-paying companies has shrunk dramatically,” Randolph said.
The portion of such companies in the blue-chip Standard & Poor’s 500 index, based on market capitalization, declined from 96.7% in 1990 to 74.8% in 1999. The drop makes buying good companies harder for Select’s and Heritage’s managers, American Century said.
Select Fund, begun in October 1958, and Heritage, launched in November 1987, are the firm’s only growth funds with such dividend percentage requirements.
Russel Kinnel, an analyst at fund tracker Morningstar Inc., said a tax cut a few years ago made capital gains more attractive to investors than dividends, which in turn made companies more likely to buy back stock than raise payouts.
“And on top of that, we have seen a real growth bias in the market, which has really made those dividend requirements a big handicap,” Kinnel said.
Ironically, the two funds have held up fairly well this year, as old-economy “value” stocks have revived. Select is up 5% and Heritage 10%.
