Although Gabelli Equity Income Fund (GABEX) has been a relative laggard over the trailing 12 months through July, its trailing 3- and 5-year performance numbers are in the top third of Value Line’s Income objective group. What’s more, over the trailing 10-, 15-, and 20-year time periods, the fund is in the top 10% of the group (it’s actually in the top 1% over the trailing 20 years). While past performance isn’t predictive of future performance, as the legal warning goes, the fund’s history is pretty impressive.
The next most interesting feature of the fund is its managed distribution policy. Most funds pay dividends quarterly (or even less often) and allow the disbursement to fluctuate based on the income received from holdings. Gabelli Equity Income Fund pays three cents a month every month, and has been doing so since this policy was put in place nearly a decade ago. Although that $0.36 a year resulted in a much more impressive dividend yield a decade ago, it offers something that most other funds don’t—consistency.
Although the recent dividend yield of around 1.5% isn’t much to write home about, investors trying to fund a monthly budget with their investments might find a monthly check from a mutual fund quite alluring. That the dividend was maintained through the 2007-2009 recession makes the fund even more enticing, seeing that many formerly steady dividend payers cut or eliminated dividends during that economic downturn (most notably banks). Although inflation is an issue with a dividend that hasn’t been increased in nearly 10 years, the fact that the fund has returned an annualized 8.2% over that span (well ahead of the broader market and similar funds) should help to alleviate any concerns since capital growth is easily keeping up with inflation.
Although the expense ratio is a tad high relative to its peers, the consistency of the dividend might offset that concern for investors looking to replace a paycheck. In fact, as part of a more broadly diversified portfolio focused on income, the fund could provide an added boost of capital appreciation that might otherwise be lacking. The fund is managed by Mario Gabelli.
The fund’s objective is total return, with an emphasis on current income. Management focuses on companies that it believes are well managed, have strong free cash flow, and that appear likely to benefit from long-term economic trends. Examples of the later include the globalization of the industry in which a company operates or an increased focus on productivity. The dividend yield of the Standard & Poor’s 500 index is used as a yield benchmark for stocks being considered for the portfolio. In addition, management likes to see a value catalyst, such as industry developments, changes in management, or the development of a profitable new business, that it believes will propel the stock price higher after purchase.
In addition to equity securities, the fund may also contain preferred stock and convertible securities. Management believes that select preferred and convertible securities offer opportunities for capital appreciation and income, noting that this may be particularly true in the case of companies that have performed below expectations. Indeed, in such cases a preferred stock and or convertible debt security may trade more like common stock than like a fixed income security, thus providing both appreciation potential and current income.
Although the fund has an impressive history and provides a stable dividend, it isn’t appropriate for everyone. Investors focusing on capital appreciation over income would probably find other funds more appealing, as would those in search of higher yielding fare. However, for most other investors, Gabelli Equity Income Fund would be a suitable consideration for either the large-cap value component of an otherwise diversified portfolio or the entire equity component. This is particularly true of investors looking for a consistent dividend stream from equities to complement more material income streams provided by fixed income securities. Based on the managed payout, investors in search of a larger dividend yield might want to keep this fund on a watch list for the next market selloff.
At the time of this articles writing, the author did not have positions in any of the companies mentioned.