Quick Take: With the market undergoing "a bear of all bears," Cliff Hoover Jr., co-manager of PIMCO Small Cap Value Fund (PCVAX), touts his fund's mantra of holding only dividend-paying companies as sound. As the bear market eats up much of the capital appreciation promised by companies not paying dividends, Hoover thinks firms with reliable dividends are the best source of long-term investment gains.
Hoover also thinks the discipline of paying regular dividends keeps companies from spending too much on plants and equipment, as Corporate America has in recent years.
Focusing on dividends has paid off for Hoover, since he says it has kept the fund in steadily growing companies and out of imploding sectors such as technology. This year through August, the fund was up 2.3%, while the average small-cap value fund lost 10.2%. Last year PIMCO Small Cap Value rose 18.6%, while its peers gained 14.1%.
The Full Interview:
S&P: What sets your portfolio apart from other small-cap value funds?
HOOVER: One fairly unique ingredient is that every holding must pay a dividend. Today, the fund's yield is about 3%, but we hold stocks with various yields, including utilities and REITs, whose average yields are about 7%.
Another relatively unique factor is that we have a diversified portfolio — about 100 stocks in about 50 industries.
S&P: Why do you focus on dividend-paying companies?
HOOVER: Dividends instill discipline in corporate managements We feel it is very important for a management team to return some cash back to shareholders. Maybe then companies won't buy a tenth factory as a result. Studies now show that many corporate reinvestments of cash in the last ten years were poor uses of capital.
You can't simply trust managements to always reinvest money properly and then expect to see the results through stock appreciation. Maybe you will and maybe you won't. We think the pendulum is swinging back to dividend-paying companies. Studies also show that dividend-paying stocks outperform non-dividend paying stocks.
S&P: Is it difficult to find enough dividend-paying stocks?
HOOVER: There is a scarcity of dividends now. Corporate America is probably so leveraged that many companies won't be able to implement a dividend for some time.
S&P: What are your price/earning parameters for holdings?
HOOVER: We don't like to own a stock with a higher valuation than our universe, the Russell 2000, which has a p/e of 22. Even in industries where p/es are typically higher, we wouldn't own a stock.
We won't just gravitate to the low p/e industry. If one industry has a p/e of 6 and another industry has a p/e of 12, we won't just pick the 6 p/e industry. We'll assess the two industries and look at the industry structures. Then, we may decide that the 12 p/e industry is cheaper historically than the 6 p/e industry.
S&P: Do you consider sector trends when picking stocks?
