Don Wordell is a dividend devotee, whose primary focus is mid-size companies priced at a discount. And Don has proved his mettle as head of RidgeWorth Mid-Cap Value Equity (SAMVX), one of the top-performing funds in its category, up more than 17 percent this year through Dec. 10, and with a three-year annualized return of 12.5 percent. So I wondered: Would a potential hike in the dividend tax rate change Don’s emphasis on companies that pay a consistent dividend? Somewhat surprisingly, the answer is no. Unlike many pundits, Don doesn’t think tax increases will cause a stampede out of dividend-paying stocks. Beyond that, Don is actually quite bullish on the market and has been investing accordingly. 

Dividends are a major component of your investment strategy. Will an increase in dividend taxes affect your approach?

No, not at all. Since the 1960s, dividend-paying stocks have historically outperformed non-dividend stocks, with the exception of the Internet bubble back in the 1990s. Remember that it wasn’t until 2003 that dividend taxes were reduced. So history shows that even when dividends are taxed as ordinary income, dividend-paying stocks do better than the non-dividend universe.

There’s also been a major demographic shift. The baby boomer generation is now looking at retirement and focusing more on income investments.

So there might be a short-term blip in valuations, or some trading around a change in the tax rate, but that would create opportunities for long-term investors.

What do you think will occur with the fiscal cliff?

We will probably go over the cliff. But if a deal does get done, it will likely be in the first quarter of 2013. In the short term, however, we’ll probably get some kind of tax reform. I believe taxes will rise, but that any tax hikes will be accompanied by at least some spending reductions.

Some CEOs say if we can get within 10 percent of what the Simpson-Bowles plan targeted, then that’s a decent outcome. I agree with that.

As the fiscal cliff deadline gets closer, we could have some volatility in the market. But the market has probably already discounted most of the likely scenarios. There are factors other than the fiscal cliff that will be driving the stock market. Among the bigger issues right now are things like the recovery in developing economies. China’s economy seems to have found a bottom, and the US housing recovery is progressing well.

So how is your portfolio positioned at present?

We have a pro-cyclical bias right now. We are overweight in industrials, materials and energy for these reasons: We’re seeing the beginning of a recovery in China, Europe seems to be stabilizing, the emerging economies are still performing well, and the rebounding domestic housing market will help boost employment. At the same time, there’s a tremendous amount of monetary stimulus in place globally.

These factors will continue to fuel the insatiable global demand for energy, and with that comes demand for infrastructure. And companies that build such infrastructure are poised to benefit. When China and the rest of the emerging world are in growth mode, they need natural gas pipelines, refineries, and chemical plants. In the US, we’re beginning to see similar projects, such as chemical plants being built along the Gulf Coast because natural gas prices are so cheap. All of this spurs economic activity.

Has this been the recovery that we wanted? No, but the economy is moving in the right direction nevertheless. That’s why I’m positively disposed to pro-cyclical names, especially industrials with a global reach that have great balance sheets and margins. These are the type of characteristics the market will favor.

Are there any sectors people should be avoiding?

I would be very cautious with utilities. What investors are paying for utility earnings right now just isn’t realistic, with price-to-earnings (P/E) multiples at 14 or 15. That’s quite a premium for a highly regulated earnings stream that’s probably headed lower. So I’m not at all excited about utilities at this point, especially since you can find attractive yields in other names that actually have upside earnings power with more attractive prospects.

And given the historically low interest rates, regulators in most states will probably lower utilities’ allowed return on equity, and they won’t be able to invest enough in their rate bases to offset that. At the same time, the US power markets aren’t going to recover much more, due to low natural gas prices and increased capacity. So unless a big move in demand drives power prices higher, I don’t see the value in these stocks. If there’s a sudden jump in consumer demand, there are other stocks I’d rather own that have a more pro-cyclical bias, similar dividend yields and better balance sheets.

What do you like for 2013?

Right now, I’m attracted to companies such as Eaton Corp (NYSE: ETN), which has a 3.8 percent dividend yield. Eaton just completed its acquisition of Cooper Industrials, which gives the company greater global exposure to electrical products and higher latecycle growth. And it has more acquisition opportunities ahead. I can get all of this potential for just 10 times earnings and 7 times operating profit.

Rockwell Automation (NYSE: ROK) has gone through a major transformation over the last few years as it has sold its power systems business and become a pure-play automation company. As the world moves toward making manufacturing more efficient, they’re using Rockwell’s equipment.

The company has irreplaceable assets and an established global business base, so we think it’s a great company trading at an extraordinarily low valuation.

I also like Joy Global (NYSE: JOY), which makes coal-mining equipment. The US is doing everything it can to transition away from coal, and Joy has felt some of the resulting cuts. But about 47 percent of US electricity is still generated using coal, and you can’t shut that down overnight. So there’s still going to be demand for mining equipment. The company also has one of the higher market shares in China; that country hasn’t seen a proposal for a coal-fired power plant yet that it won’t build.

These stocks are all trading at really attractive valuations, around 8 times earnings.

In the materials space, I have Cabot Corp (NYSE: CBT), which recently sold its commodities business to buy a company that makes activated carbon for the mercury scrubbers used by utility plants. As a result, Cabot will benefit from tighter emissions rules that will force utilities to spend huge sums to remove mercury and other heavy metals from their exhaust.

We’re also overweight the managed-care company Cigna (NYSE: CI), which trades at just 8 times earnings. The new healthcare exchanges that are part of the healthcare reform law will be nothing but positive for Cigna. If US healthcare costs are to decline, this will require a drop in the use of healthcare services. Cigna will be well positioned to manage this. It could also sell its pharmacy benefits or life insurance businesses and use the proceeds to buy back a tremendous amount of stock.

What’s your best piece of advice for 2013?

Stay committed to your investment plan, remain diversified, and expect volatility. Actually, I would use volatility as a buying opportunity. I also think that inflation will be heading higher over the next year or two, so I would also add assets whose returns can outpace that.