Old-school dividend strategy remains relevant for investors

Portfolio managers at Morningstar’s investor conference in Chicago this week discussed the role of dividend strategies in investor portfolios. The panel was moderated by Morningstar analyst Todd Trubey and featured Mike Barclay, lead portfolio manager of the Columbia Dividend Income Strategy at Columbia Threadneedle Investments; Ramona Persaud, a portfolio manager at Fidelity Investments; and Andrew Brandon, a managing director and portfolio manager at JPMorgan Asset Management.

Panelists described dividend-paying stocks as a way to gain equity upside while reducing the impact of market volatility and inflation. Ramona Persaud compared dividend vehicles to “shock absorbers in a car,” saying they can produce a smoother ride when other parts of a portfolio are expected to be more volatile.

The managers identified several trends that have reduced investor interest in traditional dividend strategies: prolonged outperformance by a small group of large technology firms, a long-term decline in dividend yields and the growing use of stock buybacks.

Despite those trends, large asset managers represented on the panel continue to run dividend strategies. Mike Barclay noted, “Cycles come and go. They’re not dead, and they’re still an important part of an asset allocation,” citing client feedback.

Panelists discussed shifting sector exposure within income strategies. Trubey said utilities, long a core area for income investors, are becoming more linked to technology because of increased power demand from data centers. Barclay called consumer-staple names less attractive than in the past, pointing to weaker brand loyalty in categories such as snack foods. Persaud identified opportunities in international equities, where pension-fund participation in local markets has created a different mix of growth and income than in the United States. Andrew Brandon highlighted health care names including UnitedHealth, CVS, AbbVie and Abbott as examples of companies that combine durable businesses with dividend potential, and observed that the sector has fallen out of favor with many investors.

All three panelists said assessing dividend sustainability requires more than looking at headline yields or running quantitative screens. Barclay emphasized starting with the balance sheet and tracking cash flow to gauge dividend quality. Persaud cautioned that pure quant approaches can create concentrated risks, recalling that some models were heavily exposed to the financial sector before the global financial crisis. She said bottom-up, fundamental research can add incremental value in dividend-focused strategies.

Panelists recommended close review of balance sheets and cash flow when judging whether a dividend can be maintained or increased. They noted that buybacks and yield compression have changed the landscape for income investors, and that managers use fundamental analysis rather than yield-only metrics when constructing dividend strategies.