With the market experiencing such volatility as of late, many investors are seeking “safer” investments to protect their portfolios. A common strategy is to seek out well-managed dividend paying companies to provide some stable cash flow, while keeping exposure to equity markets. Dividend paying companies provide investors two ways to earn a healthy return, via capital appreciation or through the payment of a dividend. Dividend-paying stocks can be used to hedge against inflationary pressures, big downswings in the market environment and as a way to gain cash without moving in and out of positions.
While we do understand the benefits of investing in dividend paying stocks, we do not focus on yield alone nor do we seek out companies that pay the highest yield. Our main focus is always to find companies that are able to earn more than their economic cost of capital (positive Economic Margin), following a sound management strategy and that are trading at a discount to their intrinsic value according to our valuation model. AFG’s Investment Grade™ model takes into account all of these factors as well as quality of earnings, momentum factors etc. and attaches a simplified letter grade from A to F signaling the attractiveness of a company as an investment opportunity.
While we remain focused on valuation and identifying well-managed firms we do see a healthy dividend yield as an added bonus for investors. We also like to pay attention to what is working in the market and to help our clients take advantage of any beneficial trends. One interesting trend to point out is that companies paying the highest dividend yields have performed well so far this year. We broke up the Russell 1000 Companies into quintile buckets based on dividend yield and as you can see in the chart below the two top quintile buckets have delivered healthy returns and outperformed the index as well as the companies within the lower dividend paying quintiles.
If your focus is to add some dividend income to your client portfolio we have provided a list of 15 companies that meet our Investment Grade criteria to earn an “A” or “B” grade that also pay a dividend above what could be earned by purchasing a 10-year US Treasury note (current yield 2.17%). This list is a solid starting point for money managers looking for investment ideas that provide a steady income stream.
Alternative to the list of attractive companies provided, AFG puts together a focus list in the context of a portfolio that is centered on the concept of dividend paying companies that have attractive valuations. AFG calls this focus list the AFG High Dividend Strategy (AFG HD). The AFGHD is a low turnover portfolio that has exposure in each economic sector, holding anywhere from 25-35 securities. This focus list marries the idea of high quality companies that pay a dividend but also have capital appreciation characteristics. For information on our High Dividend Strategy Portfolio or any of our other research products, click here for a free trial or email us at firstname.lastname@example.org.