Investors in today’s market are navigating a series of “what ifs” – potential policy shifts from the Trump administration in the U.S., interest-rate changes and uncertain global growth rates. I believe that a long-term, high-conviction approach to dividend investing is an asset in today’s short-term-focused, myopic markets.
Our process focuses on investments with above market yields over a two- to three- year holding period. We look for businesses with an attractive risk/reward profile based on our disciplined valuation framework and rigorous fundamental research. The process includes scenario analysis and analyzing the strength of an investment’s balance sheet and cash flows. I believe investors benefit from our long-term focus because it allows our thesis to play out in full, without being affected by short-term noise in the market.
Building high-conviction portfolios
What does this mean in practice? First, we focus on finding high, yet defensible, yields by emphasizing the strength of company balance sheets and cash flows. We seek to identify firms with stable and/or growing free cash flow over a full cycle, as well as a track record of returning capital to shareholders.
It’s important to differentiate between companies that have high, but sustainable, yields from those that are volatile and possible yield traps. This is particularly important at inflection points. We do this through robust balance sheet and cash flow analysis over multiple scenarios to help us avoid companies that don’t have the cash flows or capital structure to sustain their dividend. I believe this focus helps us isolate potential yield traps and instead add strong, defensible yields to our portfolios.
Dividend income and traditional fixed income – working together
Dividend-paying stocks can serve as a conservative foundation to help investors build sound portfolios. We aim to enhance value by finding stocks with above-market, but defensible, yields with consistent and/or growing dividends. This type of strategy can help investors earn income, build assets and preserve capital over time.
Another benefit of this approach is that it can offer valuable income diversification and help mitigate the inflation and interest-rate risks that exist within many traditional fixed-income portfolios. I believe that dividend-paying equities and traditional fixed-income work very well together to help investors build strong long-term portfolios and meet monthly income needs.
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Keep an eye out for more commentary from Meggan, covering her strategy around dividend reductions, avoiding yield traps, risks in the current market and more.
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