In Search of Dividends...and More

BRIAN MCMAHON, THE 53-YEAR-OLD chief investment officer and CEO of Thornburg Investment Management, has overseen both stock and bond funds for the company since 1984. The blended $4.1 billion Thornburg Investment Income Builder Fund (TIBAX), which he manages, has boosted its dividend 14.2% annually, on average, over the past five years. The dividend went from 55 cents per class A share for the year ended Sept. 30, 2004, to $1.07 for the year just concluded. With a 4.5% load and a 1.25% expense ratio, the fund isn't cheap. However, this year, through Nov. 11, it was up 34.2%, compared with 25.9% for its benchmark, the MSCI World Index. Last year it fell 34.6%, while the index was down 40.4%. McMahon, a Santa Fe resident who likes to hike, golf and ski, says the New Mexico weather has been great this year, just like the results at his portfolio.

Barron's: You had a white Halloween?

McMahon: Yes, we've had snow already. I know guys who have gone skiing up at Santa Fe Ski Basin. You can see it from our office building. So far this year, they've gotten a couple of feet up there. There are no lifts running; you have to walk up. It isn't always that way in October, but this year is starting out pretty good.

It wasn't a good start this year for stocks and bonds, as they continued the massive selloff that began in October 2008. Even dividend stocks, which are supposed to hold up better in a bear market, posted extremely disappointing results. Financials were among the biggest payers of dividends, and they were whacked.

Yeah, we know all about that. We have a lot of financial names.

Did you buy them in March this year or last November?

Some of each, and I don't feel bad about having bought anything, even in November, when the market went down so much. In fact, our Income Builder fund's bond portfolio performed worse in the fourth quarter of 2008 than our stock portfolio did. They were both bad.

Corporate bonds took an unbelievable hit before coming back strong.

They got killed, absolutely killed. We ratcheted up from about 30% to 45% in bonds during that six-month period between Sept. 30 and March 31, but we didn't have much to show for it until more recently. So yes, they got killed, but it was the buying opportunity of a lifetime for people who could anticipate needing some income.

High-yield bonds also were bludgeoned, but they didn't turn around until people were comfortable with higher-rated credits.

In retrospect, they would have done better sticking to high yield. In the environment then it was comfortable to buy single-As. We bought some. We bought mortgage-service bonds for some utilities at 9% and 10% yields, this time last year. That's all over now.

So what have you bought instead?

Since then, we bought things like Huntington Bancshares 8½% convertible preferred [HBAN8.5] that were pretty heavily marked down. We bought some of the BDCs [business development corporations] like Apollo Investment [AINV] and Prospect Capital [PSEC]. These are basically managed bond portfolios or leveraged-loan portfolios that got discounted in the stock market below their already discounted real values.

How do you view commercial mortgage-backed securities, which some say is the next shoe to drop in the bond market?

Most of this stuff, frankly, sits on banks' balance sheets, and they are just kind of kicking the can down the road for the moment. I hear that out of $3 trillion of this debt, about 15% of it matures next year. But I don't expect a big crisis, because the banks will work with these guys.

Given the bounceback in bonds -- and equities -- will dividends become magnets for investors?

Income is tough to come by, and the dividend for the Standard & Poor's 500 is going to be off 25%, 26%, 27% in 2009, and we just haven't seen that in our lifetime. It is pretty convenient for corporate managements and boards to say, 'Let's be conservative and let's lower the payout ratio. Let's hoard cash.' So it has gotten harder and harder to get income from a stock portfolio. The big problem that we are trying to dig out from in the United States is that the economy got too oriented toward consumption, specifically consumption of residential housing. The consequences are well-known. We are going to be in the forest for a few years.