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Ave Maria Rising Dividend Fund has found itself in a great spot as corporate payouts have been deified by investors.

George Schwartz is a resilient investor. His fund was among the top performers in its group during 2008's traumatic financial crisis, and his average annual return over the past three volatile years is a rock-solid 18%. Schwartz even claims to have read every issue of Barron's since 1967, a sign of true grit.

The 67-year-old asset manager oversees the unusual—to some, controversial—$224 million Ave Maria Rising Dividend Fund (ticker: AVEDX) with co-portfolio manager, Richard Platte, 60. It's one of six Ave Maria mutual funds that his firm, Schwartz Investment Counsel, runs in Bloomfield Hills, Mich.

The funds adhere to Catholic values that are upheld by an advisory board that features former Notre Dame football coach Lou Holtz, CNBC commentator Larry Kudlow and conservative activist Phyllis Schlafly. Although the funds are open to anyone, 98% of shareholders are Christian, mostly Catholic. In all, Schwartz's firm handles roughly $1 billion in assets, about $725 million as advisor to the Ave Maria funds, $37 million from the Schwartz Value Fund (RCMFX), and the rest in separate accounts.


DESPITE THE RELIGIOUS connection, most of the two Ann Arbor natives' time is spent on financial analysis. The bottom-up, value managers seek companies with great products, high barriers to entry, low leverage, and high recurring cash flow run by managers who reward investors by consistently increasing dividends. The ultimate is a company with a valuable business franchise that has high margins, good sales growth and high-return on assets.

"Some industries, like utilities and other capital-intensive industries, don't lend themselves to our approach. They tend to have heavy debt leverage, low returns of capital, and little control over their own destiny," says Schwartz, who serves as president and CEO of the parent firm.

Near the end of its financial analysis, Ave Maria applies a "morally responsible screen" (versus socially responsible screens for cigarette makers or big polluters). It excludes firms whose policies the church might view as antifamily or antimarriage.

Distributors of sexually explicit material are out. So are companies with any role in contraception or abortion, like insurer Aetna (AET), which covers tubal ligation, and Teva Pharmaceuticals Industries (TEVA), which makes a "morning-after" pill. Also out: companies that give to Planned Parenthood or are involved in embryonic stem-cell research. About 150 names are excluded. Some wouldn't clear Ave Maria's financial screens anyway, Schwartz says.

The added hurdle hasn't held back performance as dividends have become crucial to investors. Fourth-quarter gains of 11.4% helped Ave Maria up 6.9% as of Jan. 13, versus a 2.9% gain for the Standard & Poor's 500 index. That was good enough to beat 96% of its large-blend rivals for the trailing year. For three years, the no-load has risen 18% compared with a 17% gain for the S&P. It's also topped 97% of its peers for the trailing five years, climbing 3.9% to the S&P's flat line. Impressively, Ave Maria fell 23% amid the S&P's 38% decline in 2008. The fund, which has a turnover rate of just 34%, has an expense ratio of 1.02%, and no 12b-1fees.

If Platte and Schwartz each have an eye cast toward heaven, the other is focused on balance sheets. The biggest of Ave Maria's 41 holdings is ExxonMobil (XOM), which shot up 16%, in 2011 to $84.76, well above their average cost of $69.09. "If they keep buying back stock at eight and nine times earnings, in 15 years, there won't be any stock outstanding," jokes Schwartz. Platte calculates that ExxonMobil has reduced its share count by 30% over the last decade.

Ave Maria's managers expect the payout to rise by a dime, to $1.95 this year on earnings of $8.37 a share. ExxonMobil's payout could rise to $2.05 on 2013 earnings per share of $8.96.

The managers agree that 3M (MMM) is a "money machine." The St. Paul, Minn., company, known for Scotch tape and Post-It notes, has been able to lift dividends for 53 years, thanks to a track record of creating new, often proprietary, products. "Year after year, they produce terrific returns [25% return on equity; 15% profit margin], with almost no debt," says Schwartz. 3M's net debt-to-capital ratio remains in single digits, despite its recently announced $550 million all-cash purchase of Avery Dennison's (AVY) office-supply unit.

The shares recently traded at $84, up from Ave Maria's average cost of $68.62. Schwartz and Platte expect EPS to rise 6%, to $6.31, in 2012, with free cash flow of $9 per share. In 2013, EPS should reach $6.79, while free cash flow increases to $9.75.

St. Louis' Emerson Electric (EMR) is another favorite. The diversified industrial company makes everything from switches and motors to manufacturing and climate-control devices. It's posted 55 years of dividend hikes, and has little long-term debt. Schwartz and Platte believe that the shares, now at $49.25, are a bargain. "The stock price came under pressure recently because of a drop in orders, but we are not worried about their long-term prospects," Platte explains.

Earnings per share are expected to rise to $3.55 in fiscal 2012, ending in September, from $3.24 in 2011, before rising to $4 in 2013. The dividend yield is 3.4%, and should grow 8% to 10% annually as earnings improve, he says. "Their share count is dropping rapidly as they return cash to shareholders in the form of dividends and share repurchases," says Platte.

A final pick that's also experienced some selling of late: Arizona-based Microchip Technology (MCHP), whose long-lasting microcontrollers are used in a variety of devices like thermostats and refrigerators. The stock has come down from its 52-week high due to an inventory glut, and to weaker economic growth in Europe and Asia, but Schwartz and Platte see these as short-term issues. "It has $7 of net cash per share on a $36 stock," Platte says. Ave Maria's average cost is $32.93. They see the 2012 fiscal year ending March 31 producing earnings of $1.86 and $1.99 in 2013.

"Microchip has raised dividends quarterly every year since [it] started issuing dividends in 2002," he says.

For Ave Maria, that's just divine.