Equity Income Funds

Since the dividends are taxed at lower rate, equity income fund may be a good option for investors. The table below lists some "Equity Income" funds from the varions fund complexes with their yields, 10 year annualized performance and their expense ratios. All seven funds have provided decent returns to investors over the last decade.

Equity Income Fund Name	Yield	10 Year Annualized Performance	Expense Ratio
Vanguard Equity Income Fund Inv (Symbol: VEIPX)	2.41%	12.66%	0.32%
Fidelity Equity-Income Fund (Symbol: FEQIX)	1.49%	11.94%	0.70%
Fidelity Equity-Income II Fund (Symbol: FEQTX)	1.50%	11.65%	0.64%
American Century Equity Income Inv (Symbol: TWEIX)	2.29%	15.34%	1.00%
T.Rowe. Price Equity Income (Symbol: PRFDX)	1.54%	13.00%	0.78%
Parnassus Equity Income Fund (Synbol: PRBLX)	2.51%	12.60%	0.95%
Gabelli Equity Income Fund (Symbol: GABEX)	1.92%	13.39%	1.49%

• The American Century Equity Income is a mid cap fund. It has the highest return of the group. The small and mid cap stocks have had good returns in the last 5 years.
• The Vanguard Equity Income fund has the lowest expense ratio. No surprise there.
• The data is retrieved from the MoneyCentral web-site.

Taking Pulse of S&P 500 Index

• Out of 500 stocks that make up S&P 500 index, 123 pay no dividend at all.
• 108 stocks have dividend yield less than 1%.
• 132 stocks have dividend yield between 1% and 1.99%.
• 61 stocks have dividend yield between 2% and 2.99%.
• 40 stocks have dividend yield between 3% and 3.99%.
• 26 stocks have dividend yield between 4% and 4.99%.
• 12 stocks have dividend yield of 5% or more.
• The highest dividend honors goes to Equity Office Property Trust (Symbol: EOP) with 6.90%. The second and third highest yielding companies are Apartment Investment and Management Co. (Symbol: AIV) and General Motors (Symbol: GM) with dividend yields of 6.60% and 5.60% respectively.
• The stock with highest revenue per annum is Wal-Mart (Symbol: WMT) with $278.5 Billion, while the stock with lowest revenue per annum is Applied Micro Circuits Corporation (Symbol: AMCC) with $214 Million.
• The company with highest number of employees is Wal-Mart (Symbol: WMT) with roughly 1.5 Million, while available data indicates that the Ambac Financial Group, Inc. (Symbol: ABK) has just 407 employees.
• What about the revenue per employee? Each employee of Fannie Mae accounts for $10,402,000 in revenue, which is the highest revenue per employee among the S&P 500 companies. The lowest revenue-per-employee company is Yum! Brands (Symbol: YUM), with each employee generating only $34,000 in revenues.
• Even though the Ambac Financial Group, Inc. has the fewest employees, they are the most profitable employees. They each generate $1,706,000 in profits for the company. The second most profitable employees sit in the offices of Fannie Mae and they each generate $1,521,000 in profits for their employer.

Disclaimer: The numbers provided here are for general information purposes only. No investing descisions should be made based on the information provided here. The stock screener tools at www.MoneyCentral.com and http://finance.yahoo.com were used to gather the information specified above.

Relative Valuations of Various Indexes

In the following table, I compare various stock market indexes and their P/E ratios, Earnings Growth and PEG ratios. To make the life easier, I just compare the vanguard index fund data as proxy to their respective indexes. It is always helpful to compare indexes this way to find out where the future returns may lie in the stock market. The data is as of 12/31/2004 and it is retrieved from the vanguard web-site.

Fund Name	P/E Ratio	Earnings Growth	PEG Ratio
S&P 500 Index (VFINX)	19.6	9.5%	2.06
Total Stock Market Index (VTSMX)	22.4	7.5%	2.97
Large Growth Index (VIGRX)	25.3	12.6%	2.01
Value Index (VIVAX)	16.4	7.6%	2.16
Mid-Cap Index (VIMSX)	22.1	12.5%	1.77
Small Cap Index (NAESX)	25.2	8.5%	2.96
Small Cap Growth Index (VISGX)	33.1	14.9%	2.22
Small Cap Value Index (VISVX)	20.3	4.0%	5.06

Some Observations:

• The first thing that catches the eye is the P/E ratio of Small Cap Growth index. At 33.1, it is way above the historical average.
• The lowest earnings growth is in the Small Cap Value index. The PEG of 5.06 indicates that the price we pay is much higher for the amount of growth.
• The lowest P/E honors are held by the Value index fund, which is basically a large cap value index fund for the comparison purposes. But, P/E at 16.4, it is still above the historical P/E average of the broader stock index.
• The lowest PEG honors goes to Mid Cap index fund. The reason for this low PEG is above average earnings growth of 12.5% and a P/E of 22.1 that is below small cap stocks.
• A blend index with P/E less than 20 is S&P 500 index.
• The PEG of Large Growth index fund is less than the S&P 500 index fund. Are Large Growth stocks undervalued?
• The PEG of Large Growth index is even less than the Value index fund. Are Large Growth stocks on sale?

2005 Earnings Estimate for S&P 500 Index

The Standard & Poor's (S&P) web-site lists the earning estimates for the S&P 500 index in a excel spreadsheet. The 2005 estimates for each quarter are listed in the table below. The estimates are for operating earnings and as reported earnings.

Quarter Ending	Operating Earnings Estimate	Reported Earnings Estimate
03/31/2005	$17.32	$17.35
06/30/2005	$18.39	$16.82
09/30/2005	$18.66	$17.00
12/31/2005	$19.40	$14.96
2005 Totals	$73.77	$66.13

The operating earnings for the calendar year 2005 are estimated at $73.77 at this writing. The historical average P/E for S&P 500 is about 15. The "fair value" of the S&P 500 index at the end of 2005 should be around 1107 (73.77 * 15 = 1106.55) with this valuation criteria. Today, the S&P 500 index stands at 1195.98. Assuming from now to end of this year the index goes nowhere, the index is about 8% overvalued. Mind you, this is based on operating earnings, which does not provide the true glimpse of the profit picture.

As Reported Earning estimate stand at $66.13 for 2005. This indicates the "fair value" at the end of 2005 at 992 (66.13 * 15 = 991.95), which would make the index about 20% overvalued.

The "Core Earnings" estimates are not provided by the Standard and Poor's at this time. The common wisdom is that the core earnings will come below the operating and reported numbers, and thus would make even stronger argument of index being overvalued as of today.

Anyway you look at it, the S&P 500 index looks at least 8% to as much as 25% overvalued.

Money Market Yield Above 2%

Just checked the Vanguard web-site for money market fund yields and I am happy to see that the Prime Money Market Fund (Symbol: VMMXX) is finally yielding 2%. My monies are finally working for me. It is about time.

The Short Term Bond Index Fund (Symbol: VBISX) is yielding 3.31%. The duration of this fund is 2.5 years. There is a very good possibility of rates rising by as much as 2% this year. In this situation, the return of the short term bond index fund might be zero or negative.

Cash is king today.

The Dogs of S&P 500 as of 1/9/2005

Investing in dogs of Dow stocks (stocks of Dow Jones Industrial Average with high dividend yield and low P/E ratio) is a well known successful investing idea. This investing technique has produced market-beating returns in the history. I don't know what happens if we migrate this same investing principle to S&P 500 index.

Below are the stocks of S&P 500 index fund with dividend yield of 3% or more, and P/E ratio of 15 or less. These stocks are the dogs of S&P 500. It will be interesting to see the return of these stocks after one year.

Symbol	Company Name	Current Dividend Yield	P/E Ratio: Current	Previous Day's Closing Price
GM	General Motors Corporation	5.1%	5.2	$39.45
MRK	Merck & Co., Inc.	4.9%	11.4	$31.53
DTE	DTE Energy Company	4.8%	13.4	$42.68
MO	Altria Group, Inc.	4.8%	13.2	$60.51
XEL	Xcel Energy Inc.	4.8%	9.5	$17.52
KSE	KeySpan Corporation	4.7%	14.5	$38.91
MMC	Marsh & McLennan Co's	4.4%	13.7	$31.68
WM	Washington Mutual Inc.	4.4%	12	$41.13
NI	NiSource Inc.	4.2%	13.9	$21.97
BAC	Bank of America Corporation	4%	12.2	$45.22
USB	U.S. Bancorp	3.9%	14.6	$30.99
BLS	BellSouth Corporation	3.9%	12.2	$27.46
NCC	National City Corporation	3.9%	9.4	$36.59
KEY	KeyCorp	3.8%	13.9	$32.78
RF	Regions Financial Corp.	3.8%	13.4	$35.07
FHN	First Horizon National Corporation	3.8%	11.7	$42.72
PNC	PNC Financial Services	3.6%	13.8	$56.05
CMA	Comerica Incorporated	3.5%	14.7	$59.48
WB	Wachovia Corporation	3.5%	14.1	$52.17
MAY	The May Department Stores Company	3.4%	14	$29.11
HBAN	Huntington Bancshares Incorporated	3.3%	14	$24.38
SLE	Sara Lee Corp.	3.3%	13.7	$23.75
EIX	Edison International	3.2%	13.8	$31.18
PPL	PPL Corporation	3.2%	12.3	$51.36
LNC	Lincoln National Corporation	3.2%	8.4	$46.72
CVX	ChevronTexaco Corporation	3.1%	9.4	$51.73
FITB	Fifth Third Bancorp	3%	14.4	$46.26
JP	Jefferson-Pilot Corporation	3%	13.2	$50.42
MRO	Marathon Oil Corporation	3%	9.1	$36.28
FNM	Fannie Mae	3%	9.1	$70.35

These stocks are sorted by their dividend yield in descending order. The data is as of January 9th, 2005.

S & P 500 Earnings Analysis for 10/01/2003 – 09/30/2004

The Standard & Poor’s website maintains “S & P Earnings and Estimate Report” for the S& P 500 fund on its website. This data is published on a excel spreadsheet, and is available freely to everyone.

Let’s take a look at the numbers for the rolling one-year from 10/1/2003 to 9/30/2004. Each quarterly dataset has following four numbers: operating earnings, as reported earnings, core pre-pension earnings, and core earnings.

Quarter	Operating	Reported	Core Pre-Pension	Core
10/01/2003 - 12/31/2003	$14.88	$13.16	$12.93	$12.93
01/01/2004 – 03/31/2004	$15.87	$15.18	$14.02	$13.75
04/01/2004 – 06/30/2004	$16.98	$15.25	$14.51	$14.03
07/01/2004 – 09/30/2004	$16.88	$14.18	$14.18	$13.66
Totals for the year	$64.61	$57.77	$55.64	$54.37

At 9/30/2004 the S & P 500 index stood at 1114.58. Using this number let’s calculate the P/E ratio with each of the total earnings above.

Earnings	Operating	As Reported	Core Pre-Pension	Core
P/E ratio	17.25	19.29	20.03	20.50

The core pre-pension P/E is lower than Core P/E. This indicates that due to the higher stock market returns in this time period, the corporations had a net income from their pension plan investments.

Now, Let’s consider the flip of the P/E ratio. This is E/P ratio. This comes out to be about 5%. This means that if anyone invests $100 in S & P index fund, the total underlying return is 5%. The 10-year Treasury bond yield was around 4% in above-mentioned time-period. The stocks are cheaper by as much 20% by this valuation measure.

Historically, the stock market P/E has averaged about 15 with trailing 12-month earnings. On 9/30/2004, the stock market P/E stood at 20. By this historical measure the stocks are fairly valued at 54.37 * 15 = 815.55, which is about 25% below from the close of 1114.58 at 9/30/2004. According to this formula, the stocks are overvalued by as much as 25%.

Large Growth vs. Small Value

From year 2000 to 2004 (for 5 years), the small cap stocks have outperformed large cap stocks by as much as 9.35% as described here. Also, for the same time period the value stocks are beating down the growth stocks by 9.5% annually as mentioned here.

Now, let's consider the Vanguard Large-Cap Growth index fund returns to the vanguard Small-Cap Value index fund from year 2000 to 2004. For large cap growth, the return is -6.94% annualized and for the small cap value, the return is +15.05% annualized. This is the difference of about 22%. This is startling.

We will have to see how the story unfolds from 2005 to 2010. My guess is that this trend will not continue for long. I read many experts saying that the small cap value stocks are too hot, and they are overvalued. More and more small cap value stock funds are closing business for new investors.

Janus, a predominantely growth complex, just announced last week that they will start 2 new growth funds. These tells me that growth is coming back to life. The dollar is falling against foreign currencies, so big growth companies will have better returns going forward because of their overseas operations.

Low-Priced Stock?

"Normally investing at least 80% of assets in low-priced stocks (those priced at or below $35 per share), which can lead to investments in small and medium-sized companies. Potentially investing in stocks not considered low-priced. Investing in domestic and foreign issuers. Investing in either 'growth' or 'value' stocks or both."

Above is the direct quote from the fidelity web-site about the strategy of the Fidelity Low-Priced Stock Fund (Symbol- FLPSX). No textbook will ever categorize small and medium-sized businesses by their stock prices. Microsoft is very large company and today its price is in mid 20s.

Is the name of this fund misleading? I bet that there are many investors who believe they are investing in penny stocks by investing in Fidelity Low-Priced Stock Fund, which is something the fund does not do.

Small vs. Large

The outperforming of value over the growth during last 5 years has been startling. The same can be said about the outperformance of small cap stocks over their large cap counterparts. Here are some numbers to illustrate my point: The vanguard small cap index fund (Symbol - NAESX) returned 6.97% annualized during last 5 years. During the same time period the large cap 500 index fund returned -2.38%. That is, 9.35% annualized return advantage for the small cap stocks.

Now, let's see the value side of the story. The small cap value index returned 15.05% annualized in during the last 5 years. The value index fund, which is a large cap heavy value index, returned 2.43% annualized. So, the small cap values ran ahead by almost 12.5% points.

This is startling.

Value vs. Growth

According to vanguard web-site the return for S & P 500 index fund for last 5 years has been -2.38%. The return of the value index fund is +2.43% for last 5 years. This indicates a difference of about 5% points annualized for last 5 years.


In other words, value has outperformed blend with a wide margin for last 5 years.

Now, this is interesting. The growth index fund returns for the last 5 years has been -6.94% annualized. The value stocks have outperformed growth stocks by about 9.5% annualized for last 5 years.

I think this is a good time to invest in growth again. The value outperformance seen here for the last 5 years cannot continue forever. Either growth is undervalued or value is overvalued.

If the growth is undervalued then it should provide decent returns for next few years.