Fund name: Tweedy Browne Worldwide High Dividend Yield (TBHDX)

Objective: The fund invests in "companies with above average yields selling at reasonable valuations." The fund may avoid many of the highest-yielding stocks on the grounds that they represent a sort of value trap. There are two structural differences between this fund and the other two Tweedy, Browne funds (American Value and Global Value). First, this fund has more of a "value at a reasonable price" approach where the others are committed to "deep value" investing. Second, this fund will not hedge its currency exposure while the others both do.

Adviser: Tweedy, Browne Company, LLC. Tweedy, Browne was founded in 1920 as a broker of closely held and inactively traded securities. They began managing outside money in 1975 and began investing overseas in 1983. They attribute their value discipline to the work of the legendary Benjamin Graham, whose firm was a brokerage client of theirs for three decades. As of March 31, 2007 , the firm managed in excess of $14.3 billion for individuals, institutions, partnerships, off-shore funds and two mutual funds.

Manager: The same team that manages Global Value and American Value (Christopher and William Browne, John Spears, Thomas Shrager and Robert Q. Wyckoff). They’ve been with Tweedy for between 16 and 38 years. They note, with justifiable pride, that "[n]o Managing Director or former general partner has ever left Tweedy, Browne to join another investment firm." They’re supported by seven analysts.

Management’s Stake in the Fund: Both the managers and the employee profit-sharing plan invest heavily in their own funds. Messrs. Browne and Spears have invested over a million of their own money in each of the other funds. Mr. Shrager has over a million in Global and Mr. Wyckoff has invested over $300,000 in the funds.

Opening date: September 5, 2007.

Minimum investment: $2,500 for a regular account, $500 for an IRA.

Expense ratio: 1.37% after waivers. This is the same expense ratio as the other two funds.

Comments: The case for investing in high dividend yield stocks is awfully strong but the options have, until now, been surprisingly weak.

There are two arguments in favor of focusing on high dividend yield stocks. First, over the long run such stocks convincingly outperform the stock market. There are a fair number of studies examining stocks in markets around the world, for periods ranging from several years to several decades. Those studies uniformly find that high dividend yield stocks are better long-term investments, with returns of 3-7% per year above the market’s.

Second, in downturns such stocks hold up much better than the rest of the market. Research cited by Tweedy, Browne shows that the higher dividend stocks decline only half as much as the market as a whole during downturns.

There are a couple reasons why this might be true. One reason is that companies are loathe to cut dividends, since such cuts are seen as signals of disastrous corporate problems. The need to preserve capital to pay the dividend forces the management onto a sort of financial diet; they aren’t able to squander money on empire-building fantasies. As odd as it sounds, there’s a respectable body of research that says if you give a CEO a pile of cash, s/he’ll quite frequently flush it down the toilet with poorly thought-out investments that serve as a drag on the corporation for years to come. In removing that opportunity by absorbing some of the excess, dividends indirectly produce better capital allocation decisions and stronger corporations. Go figure. The second reason is that, in times of trial, investors routinely flock to large, dividend-paying stocks as a safe harbor. Those inflows act counter-cyclically: in down markets, money flows in and in up markets (when they need the investment rather less anyway), money flows out in search of "hot" stocks. The combination means these companies are supported on the downside and tend to be competitive, if not world-beating, on the upside.

The question is, what vehicle offers the best prospect avenue for such investing? The vogue answer is "a high dividend yield ETF." Sadly, the record for those funds is awfully weak. Here are highlights from the largest EFT in the sector and a couple of the others that I’ve profiled before:

Many of the ETF’s problems derive from their underlying indexes. They typically suffer from high sector concentration which makes them vulnerable to excessive losses when single sectors (in this case, financials) turn south and may focus narrowly on finding the highest available dividends without concern for the quality of the underlying corporation.

There are also several credible open-end funds with a distinctive, high dividend focus. A favorite among posters on FundAlarm’s vibrant discussion board is Alpine Dynamic Dividend (ADVDX) which has a three part portfolio:

• dividend capture (in which stocks bought then sold right around the time that a dividend is paid out)



• growth & income, which are large caps with growth prospects



• value with a catalyst, which are companies whose stocks are "depressed for reasons that we see as temporary."

The fund pays dividends monthly and has posted solid returns during its four years. As of 9/26/07, the fund’s trailing three-year return is 16.1% which is well ahead of the S&P. The downside of the fund is integral to their strategy: they buy and sell a lot (annualized turnover is 192%), which generates both market costs for the fund and an abnormally high annual tax bill. How high is open to dispute because the managers are looking to minimize the tax hit by holding the "dividend capture" stocks for 61 days, which allows (most of) them to count as "qualified dividend income." Under the ’03 tax act, those dividends are taxed at 15%, while non-qualified dividends are taxed at the normal marginal rate.

Nonetheless, Morningstar calculates that investors lose a lot to taxes. On an after-tax basis, they say ADVDX has earned just about 10% per year rather than the advertised 16%. By my simple-minded calculation, the loss to taxes might be closer to 3%. The fund has been paying out about 17% of its assets in taxable distributions. If those distributions all qualify for a 15% tax rate, then you lose 2.55% to taxes – the after tax return would be around 13.5%.

Combined with the fact that the lead manager has a negligible stake in her own fund (Morningstar reports under $10,000) and is relatively new to fund management (ADVDX is her first trial), the case for Alpine is not as simple as it first seems.

Vanguard entered the fray in April 2006 with the Vanguard Dividend Appreciation Index (VDAIX, and an accompanying ETF). They track a custom "modified market capitalization index designed to track the performance of companies that have historically increased and paid dividends annually." That, as it turns out, translates to a remarkably low dividend yield and undistinguished performance (it consistently trails the S&P 500).

Is there reason to believe that Tweedy, Browne might be able to do better?

Uh, yep.

I’d suggest three factors in Tweedy’s favor: