1. On quality: If you think about it, who has the means to grow a dividend? It is generally businesses with solid balance sheets and a lot of free cash flow—in other words, quality franchises.
2. On volatility: In our experience, a company’s commitment to paying a dividend has been shown to provide a certain discipline, and that has made for greater resilience in down markets. No corporate executive wants to cut a dividend, so these tend to be well-run companies with a capacity to weather up and down markets. Truth be told, we would be more worried about companies paying a dividend so high that it is unsustainable.
When it comes down to it, in a stock market that is feeling more uncertain and volatile than it has in several years, and when income vehicles are priced at a premium, there’s a certain wisdom (or at least well-studied prudence) in considering a slightly lower dividend in exchange for the potential for greater stability and long-term return.
This is a guest post from Tony DeSpirito and the team at the BlackRock Equity Dividend Fund, where Tony is a portfolio manager.