Sector Spotlight: Are Dividends Still In? — Q1 2018
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The thirst for yield in the low interest rate environment of the last several years has created persistent demand for dividend paying stocks. Indeed, with investment grade bonds struggling to pay an attractive yield, dividends have taken on the role of cash flow generation for many investors, and there have been pockets of overvaluation in certain parts of the market as a result. As such, as interest rates rise, it could become difficult for dividend paying equities to keep pace with the overall market, as investors are offered alternatives to earn income in lower volatility assets.
However, we remain constructive on dividend paying equities, due to our view that the investment philosophy behind investing in these companies is sound. By applying a total return approach to dividend equity portfolio management, client return objectives can be met through a combination of dividends plus capital appreciation – often with reduced volatility versus the broader market.
We believe it never goes out of style to invest in companies with durable competitive advantages in markets with compelling growth trends, run by competent management teams who have the ability and commitment to returning capital to shareholders through dividends and share buybacks.
All else equal – although it never is – a +10% dividend increase should result in +10% capital appreciation. Both returns need to be considered by clients looking to grow total wealth to meet current and future income requirements. Too often, equity invested clients focus on dividend yields without accounting for the security of the underlying capital investment and company management’s ability to pay future dividends. Given the equity market prices in future expectations, high dividend yield stocks can signal future distress.
Finally, we believe fundamentally sound dividend paying companies can also provide a level of downside protection and lower volatility, critical characteristics for investors relying on portfolios to provide explicit cash needs, as selling during times of market distress can dramatically shorten the portfolio life. In short, we believe dividend strategies remain a strong risk adjusted investment approach to meet client return objectives regardless of current trends in the market.
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View Other Articles in this Issue:
- Economic Update – Q1 2018
- A Note from Our CIO – Q1 2018
- Market Review – Q1 2018
- Looking Ahead – Q1 2018
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