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In Search of Dividends

January 3, 2012
Don Taylor

Don Taylor

In an environment plagued by grinding volatility and the nagging sensation of treading water, the stocks of dividend-paying companies have become more broadly appealing, particularly when you’re talking about yields that have recently surpassed those of long-term Treasury bonds.

As a portfolio manager immersed in rising dividends strategy, Don Taylor certainly qualifies as an experienced voice on the subject of not just dividends, but rising dividends and the role dividend-paying investments can play in a portfolio.  It’s an oft-repeated refrain here on Beyond Bulls and Bears, but—as the broader market continues in stops and starts like a stubborn mule—meticulous, company-by-company examination of fundamentals rather than sweeping generalizations based on macro movements is what Don and team turn to in their quest for stocks primed to pay with the potential to increase their dividends over the long haul. To meet the Franklin Rising Dividends criteria, here’s what Taylor looks for:

“We are screening for companies that:

  1. Have had consistent dividend increases for a long period of time
  2. Have had substantial dividend increases over that period of time
  3. Have a relatively low payout ratio
  4. Have a strong balance sheet
  5. Trade in the lower half of their 10-year P/E range.

We are focusing on companies that we think—over the next 5, 10, 15 years—can have the kind of dividend growth record that we have screened for historically, and can repeat that over that longer-term period. So if we find a company that we believe has the potential to grow its dividend at a double-digit rate, say, over the next 10 or 15 years—even if it has a pretty low yield at this point, that’s going to be a company that we will be interested in investing in.”

In a scarce yield environment, dividends from strong companies may offer appealing return potential:

“We’ve been in an environment where we have pretty low growth, but with a fair amount of volatility around that growth. What the policymakers have done to try to address that is bring interest rates down to very, very low levels. And what that has created is an environment where there’s very little yield from traditional fixed-income investments.

If you can find a high-quality company that can grow its dividend and has a decent yield to start with, that’s an attractive place to invest.”

Dividend-paying stocks can also help protect against the negative effects of inflation. For example, when corporate earnings rise in step with inflation, this can allow dividend payments to increase, whereas interest payments on bonds typically remain static unless they are inflation-indexed or variable. Dividend payments can also be an indicator of a company’s financial health, in part, because management is focused on making money to support the dividend:

“Another attribute that’s scarce in an environment like this is good, consistent, steady, above-trend growth…if we can find a company—it doesn’t have to be exceptional growth, but good, solid, predictable growth that’s above the overall economic growth—that’s an attractive place for us to be.”

What might Sir John Templeton have added?

“Buy value.  Not market trends or the economic outlook.”

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