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TIP SHEET: Higher Dividends Play To Touchstone Fund's Strength

(This article was originally published Friday.) --Touchstone fund believes in stability of pipeline companies to grow income --Upturn in dividends fueled stellar year during time of economic uncertainty --Kinder Morgan and Vodafone touted among top picks By Ian Thomson Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Oil and gas pipeline companies, with their ability to maintain stable cash flow with long-term contracts, offer investors a reliable, if cautious, opportunity during tumultuous times. Standing out like a gleaming suspension bridge over choppy waters is Kinder Morgan Inc. (KMI), the "grand-daddy of pipelines" according to John E. Leslie III, a portfolio manager with Woodstock, N.Y., Miller/Howard Investments Inc. "It's purely a toll road and even better than owning the Golden Gate Bridge," Leslie said. While the San Francisco icon's revenue is dependent upon the type of vehicle passing across it, pipeline operators are indifferent to whether their customers are distributing gas or electricity. "They've already paid in advance," Leslie said. Leslie applies that sureness--being able to match reliable cash flows with long-term financing--to the Touchstone Premium Yield Equity Fund (TPYAX) that he has managed since May 2008. Miller/Howard's strategy of finding dividend-paying companies with high current income and steady growth led to a stellar year in 2011, but that certainty might not be to every investor's tastes. The $54.9 million fund has climbed 13.8% in the past year, about 11.7 percentage points above the Standard & Poor's 500 Index, according to It is the leader in its category, outperforming its peers by 14.1 percentage points. Morningstar rates the fund as a four-star performer. Kinder Morgan ranks as the large value fund's top pick, at 6.8% of its overall weight, according to Touchstone Investments' website. The pipeline operator's structure, using its master limited partnership with Kinder Morgan Energy Partners LP (KMP), allows it to minimize corporate taxes and distribute most of its profits to investors through dividend-like distributions. Its $21.1 billion acquisition of El Paso Corp. (EP) makes it even more attractive, Leslie said, as combining the two largest natural-gas pipeline operators in North America gives Kinder Morgan even more assets to distribute through its partnership. NiSource Inc. (NI), another pipeline company, is the fund's second-largest holding at 5.1% of the portfolio. NiSource distributes gas and electricity through its pipeline network running from the Gulf of Mexico through the Midwest to New England. "It goes through the Marcellus Shale region," Leslie said. "As volume increases there, additional revenue will come." Oneok Inc. (OKE), another natural gas pipeline business, rounds out the Touchstone fund's top three picks at 4.7% of the portfolio, while Spectra Energy Corp. (SE) also ranks in its top six. Besides pipeline companies, Leslie also sees steady value in dividends. Vodafone Group PLC (VOD, VOD.LN) was another strong performer for the fund in the past year. The British mobile communications company benefited from a $10 billion special dividend declared last July by Verizon Wireless, the joint venture between Vodafone and Verizon Communications Inc. (VZ). Vodafone owns 45% of Verizon Wireless and passed on much of its share to its stockholders. "Verizon is generating so much cash, far more than they need for capital spending," Leslie said. "I don't think that special dividend is a one-time thing." While the Touchstone fund has recently blazed a trail, it had previously struggled to shine since its December 2007 inception. The fund has gained 16.6% in the past three years, about 1.4 percentage points ahead of its peers but trailing the S&P 500 by 0.9 percentage points, according to "A lot of dividend-based stocks have done well in the last few quarters," said Dylan Cathers, a mutual fund analyst with S&P Capital IQ in New York. The firm has a three-star rating on the Touchstone fund. "Clearly there were better places to be in previous years," Cathers said. "It's less volatile than its peer group, but that's not always the best bet if you're trying to outperform." -By Ian Thomson, Dow Jones Newswires; 212-416-2314; [email protected] (TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at [email protected] Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments.)

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