Some 420 companies in the S&P 500 Index pay dividends.1 If you own a fund that invests in dividend-paying companies, it’s critical for you to understand your fund’s selection criteria. Does it look for increasing dividends? Stable dividends? High dividend yields? These differences can matter greatly to your results.
I’m often asked to explain the dividend criteria of the Invesco Diversified Dividend team. All of our holdings pay a dividend and, most importantly, our analysis must indicate that the company has the financial ability and commitment to grow their return of capital to shareholders and meet our valuation and risk-reward requirements. We believe it gives us a greater ability to take advantage of opportunities across a full market cycle and avoid common sector biases that are seen in many dividend strategies.
Here are two examples of our distinctive process in action.
Our focus is on the dividend growers of tomorrow.
Many other dividend funds require a minimum history of dividend growth — for example, growth over the past five or 10 years. We believe this approach may force other funds to avoid some of the most attractive investments at the best time.
For example, in 2008, in response to great financial stress in the economy, many companies cut their dividends to preserve the integrity of their balance sheets and protect capital. This was the case for many of the regional banks we purchased in 2008-2009 amidst a wave a dividend cuts. The balance sheet is important to our process as we look for firms with sound capital structures, and that can increase their returns of capital in the future. Dividends paid by banks hit a low point in 2010, and since then payments have increased 245% compared to 93% for the S&P 500.2 Our strategy’s balance sheet emphasis and full market cycle focus help us try to find the dividend growers of tomorrow.
Our focus is on total return, not high yield.
We named our strategy “Diversified” Dividend because our total return focus — which includes capital appreciation and preservation as well as income — helps us to avoid sector biases. Our strategy is designed so that we are invested in all sectors at all times, but with no more than 25% in any single sector. In fact, we have been over/underweight most sectors versus the broad market (S&P 500 Index) since the strategy’s inception.