The Lead - "Receiving Dividends"
- Why is the shortest month of the year, February, the biggest month for dividend declarations?
- Perhaps it is because February is right before the spring, when it is the most popular time for annual meetings where company managements sit before their owners and provide an update on last year’s results.
- We discuss how a high dividend yield does not necessarily connotate financial health.
- We believe finding companies that can pay a dividend yield above 'the market' while growing it consistently and funding that increase through organic growth rather than putting their balance sheet at risk is an attractive combination in creating high conviction portfolios for clients.
The Lead - "Know What You Own"
- Over the past 20 years, we’ve said "defense wins championships” and thus far in 2022, it’s paid to play good defense.
- We discuss how dividend growers have lower volatility over time as measured by standard deviation.
- We note as of the end of last quarter, not only was the Sterling Capital Equity Income strategy growing dividends at a double-digit rate on a portfolio basis, but also on an individual basis. Over 70% of our strategy holdings had reduced their shares outstanding over the past year.
The Lead - "Optimal Yield"
- This month, Bank of America's (BofA’s) Global Research team provided long term data on the relative outperformance of Quintile 2 (20% increments) dividend yielding stocks within the Russell 1000.
- Not only were their annualized returns the best over time relative to other levels of dividend yielders, but they also exhibited the best downside capture characteristics.
- Over time, 'the market' appears to reward companies that pay above market and secure dividends, but not stretched dividend yields.
- Sterling Capital’s Equity Income portfolio yield is positioned firmly within BofA’s Quintile 2, providing another positive data point that, in our view, the strategy is well positioned to deliver attractive total returns for our clients over time.
The Lead - "History, Inflation, and Dividend Growth"
- Over the past several months, while we have discussed the ability of companies to raise their dividends ahead of the rate of inflation to their leadership positions, strong brands, and pricing power, the question is how this ability has translated into stock price performance.
- We look back 400 years as to why companies started paying dividends and how it can provide a measure of the quality of a company and its management.
- Sterling Capital Equity Income holding Medtronic provides an example of a company that began paying a growing dividend ahead of the rate of inflation during the 1970s.
- Going back five decades, the Ned Davis chart shows the performance of dividend growers in the top blue line beating actual inflation and 'the market' when inflation ranges between 4% to 13% annually.
The Lead - "Real" Dividend Growth
- This month, we discuss how the S&P 500’s dividend growth has tended to outpace inflation over time.
- During certain periods, such as the 1970s, higher inflation can challenge the ability of 'the market' to grow dividends ahead of the rate of inflation.
- We go back in history to examine how a high quality, market-leading company at the time was able to grow dividends ahead of inflation due to its strong brands and mission-critical products.
The Lead - "A Tried and True Game Plan"
- Do dividend paying stocks have the ability to “run the gauntlet” of interest rate hikes? If so, what may be the best ones to own if we look back at prior rate tightening cycles?
- We provide a chart that shows how dividend payers outperformed by over 6% and have done so 75% of the time going back to 1973.
- Historically using the same Ned Davis Research methodology, high growers outperformed low growers close to 7% 24 months after the first rate hike, 71% of the time.
- Our Sterling Capital Equity Income strategy not only owns dividend paying stocks, but those that grow at faster rate.
The Lead - "Dividends Valued in 2022"
- Dividend payers have experienced a strong start in 2022 relative to non-divided paying stocks.
- With the prospects of higher inflation and interest rates, investors are beginning to revisit the idea of looking at equities in terms of their duration and reinvestment risk.
- Within the Sterling Capital Equity Income strategy we believe clients can benefit from value creation in both the near and long term.
The Lead - "Hidden in Plain Sight"
- We believe one of our investment advantages is taking a longer-term perspective with our investments than investors who are focused on the next quarter.
- Rather than hoping value will be recognized, the ‘stacking’ of value creation is core to our quest for both growth and value.
- We highlight three actual Sterling Capital Equity Income holdings and take the dividend they pay today and divide it by the share price this month and by the share price when it was initially purchased in the strategy to illustrate the power of 'stacking' growing dividends.
- We also provide a Strategas chart that shows since the 1930s, dividends provided the majority of the total return provided to shareholders.
The Lead - "Profitable Can Be Profitable"
- Despite record levels of Federal stimulus and corporate profitability, there has been a steady rise in the number companies that are not making a profit in the market.
- The rise in the number of negative earning companies intensified because of Wall Street, which rapidly introduced the number of unprofitable companies into the public markets.
- Rather than owning non-earners with a history of excitement but underperformance, we prefer to invest in companies that generate and grow earnings.
The Lead - "Time Tested"
- As an investment team, we believe in the importance of employing time tested methods to build a franchise that lasts.
- One consistent aspect of our process within the Equity Income strategy is its double-digit dividend growth over time.
- We look back over recent history and then over decades to observe and access the consistency of the Equity Income investment process.
The Lead - "Sustainable Dividends"
- One of the most attractive features of finding companies with a stated goal of paying increased dividends over time is a long-term mindset aligned with that of investors seeking sustainable returns.
- This month, we demonstrate how stocks with five-year dividend growth rates of 9-15% have attractive S&P Global ESG rankings. This growth rate range is essentially in-line with the range of dividend growth that demonstrated relative outperformance within the Russell 1000® Value Index over the past ten years.
- We also note that an investor may expect to receive a lower dividend yield to “pay up” for more sustainable companies, however this does not appear to be the case at present.
The Lead - "Dividends: Active Vigilance"
- In a dividend growth strategy, the key is protecting the overall dividend growth rate by reducing exposure to companies that cut or eliminate their dividend.
- Ned Davis Research notes that, from January 1973-August 2021, S&P 500® stocks that cut or eliminated their dividends both underperformed dividend growers by over 11% per year and actually generated a negative absolute return.
- A high number of dividend cuts in the market tend to be rare but severe, and the challenge for long-term investors is that threats to ongoing dividend payment capacity can change.
- As active managers within our dividend growth strategy, we would note that seven stocks we sold in our dividend growth strategy over the past seven years subsequently cut or eliminated their dividends, leading to underperformance versus the benchmark and, similar to the Ned Davis research, they are currently trading below our exit price.