The Morningstar Investment Conference brought together three top dividend fund managers to discuss yield-focused investing amid key market trends like the big rally in tech stocks and booming stock buybacks.
The panelists were Michael Barclay, lead manager on the Silver-rated USD 47.4 billion Columbia Dividend Income GSFTX, Andrew Brandon, a lead manager on the USD 43.5 billion Silver-rated JPMorgan Equity Income HLIEX, and Ramona Persaud, manager on the Gold-rated Fidelity Equity Income FEQIX, which has USD 11.4 billion in assets. The panel, titled “Is the Dividend Dream Still Alive,” was moderated by Morningstar senior research analyst Todd Trubey. Their remarks have been edited for clarity and length.
Trubey: Some wonder whether dividend investing has lost its appeal, while others still really love it.
Barclay: Cycles come and go, and dividends have been an important part of total return in the S&P 500 for almost 100 years. If you’re looking for an equity strategy that’s going to give you market exposure with less risk, a prudently run dividend strategy is going to get you there pretty quickly.
Persaud: I think these kinds of funds are like silent assassins. They don’t catch much attention, but over a long period, if you run these strategies the way we do, there’s very quiet compounding.
Trubey: Does dividend yield in and of itself lead to outperformance?
Persaud: Not all factors have great alpha. Income from stocks and income from bonds tend to be thought of as bond substitutes, which means they’re very sensitive to interest rates. Interest rates tend not to be particularly predictable, so unlike other fundamental factors like valuation, the dividend yield factor tends not to be oriented toward stock outperformance.
If you combine valuation with virtually any factor, your alpha odds get really boosted. Alpha is not the only objective for the end shareholder; they also want income. When you go after yield, if you do it in a valuation-sensitive way, you can really get good excess return.
Barclay: Also, yield is just a market risk factor. It’s going to get bounced around with interest rates. It also doesn’t protect you on the downside as well as you think. Just go back to the first quarter of 2020, when the pandemic hit. It wasn’t yield that saved you in that downdraft; it was quality, the companies with strong balance sheets that could access capital regardless of whether the world was going to open up.
Trubey: Most equity income managers say quality is a meaningful dividend, not just a nominal one. How can you tell when you have a meaningful dividend that’s likely to grow over time, rather than the company throwing a bone to the market?
Barclay: We start with the balance sheet. If your balance sheet’s overleveraged, you’re going to run into trouble at some point. Where the cash flow is going will determine the quality of the dividend. And of course, you then look at things like a payout ratio relative to cash flow. If it’s too tight, they won’t be able to grow the dividend a whole lot, and if they hit a cyclical bump, they’re more likely to either stall the growth or cut.
Trubey: It seems fewer and fewer companies offer dividends, or they offer lower dividends. You see more equity income managers saying that not every company in the portfolio needs to pay a dividend. At JP Morgan Equity Income, you can now add things to the portfolio that don’t yet have a dividend. That’s a big decision.
Brandon: There are two main factors. Number one: Yields everywhere have gone down, and that’s just a function of the valuations in the market rising. Two: A lot of high-quality, technology-focused businesses are still growing, and they’re investing in that business but don’t pay much of a yield (or any yield) right now.
For a long time, our strategy had a minimum 2% yield at initiation, and that worked very well for 20 years. The universe started shrinking, and a lot of these good businesses were off-limits, so we relaxed that. Now there are changes in the Russell 1000 Value Index, our benchmark. So this year, you have the Mag Seven going from about 7% of the Russell Large Value to 17%. Amazon is expected to be at something like 6.5% of the total benchmark, and it doesn’t pay a dividend. I don’t know if we’ve ever had a 6% overweight in anything in the history of the fund.
Barclay: We’ve owned Microsoft for a long time, and we’ve been in Alphabet for over a year now, so we’re taking it under consideration. But for the time being, we have told clients we’re only buying stocks of companies that pay dividends.
Trubey: In terms of modernizing, we hear a lot about managers who say a stock buyback is kind of like a dividend. What do you all think about that?
Barclay: We have no problem with stock buybacks, but typically, they’re counter-cyclical, and management isn’t great at them. They buy back their stock when they feel good, and then a year later, if the stock pulls back, that doesn’t add value.
Persaud: I like to think of buybacks as dating and dividends as marriage. Buybacks are discretionary. It’s not a commitment; you can come and go, depending on how life is going. With the dividend, you’re committed. A shrinking share of free cash flow returning to dividends and a more discretionary use of buybacks present greater challenges.
Barclay: The dividend does show conviction in your asset allocation, though. When companies have conviction, they feel good about the dividend, and a lot of the time, buybacks are just soaking up stock compensation.
Trubey: It’s widely assumed that when a company cuts a dividend, it’s a disaster. Where do you all stand on that?
Barclay: Usually, the market sniffs out a dividend cut or elimination the year before, and when it finally gets around to cutting the dividend, it actually does well over the next 12 months. There’s a lot of information in dividend actions, and it’s not just cuts. If the dividend’s growth starts to decelerate, that’s also a red flag that you have to do the fundamental work around engaging with management.
Trubey: When that happens, what are you asking the CFO or CEO?
Barclay: Let’s take Procter and Gamble. This year, they slowed their dividend’s growth rate. We got on the phone with them and asked why, and they plainly said, ‘Look, the rising cost of oil is going to cost us a billion dollars of free cash flow over the next 12 months. Under the circumstances, we thought that it was prudent to slow the dividend growth for 2026.’ And we said, ‘Great. In 2027, if nothing changes, we’re going to be back at you, and want to see that rate of growth go back up.’ So that’s how we engage in hand-to-hand combat with every company, talking through their dividend policies.
Trubey: Over time, certain areas we thought of as home bases for dividends have evolved. What industries do you now find most interesting? Which ones do people assume are good, but may not be so much anymore?
Brandon: One space we’ve been talking about is the healthcare sector. It’s completely fallen out of favor. Pharma has issues with patent cycles. Still, companies like Abbott Labs and AbbVie are good businesses, and they’re still growing nicely. But I think it’s mostly a function of so much excitement for AI. It’s a vacuum drawing everything over there. If you step back and take a long-term view, that’s a great opportunity.
Barclay: One of the things staples are suffering from is that brand loyalty isn’t what it was. When you walk down a supermarket aisle through the potato chip sector, you’ve got your white labels, your premium brands, and your niche upstarts, and those brands keep getting squeezed because the consumer is just not loyal.
