Dividend equity strategies have wide appeal among investors. And not just for the steady income they can provide, but also for their risk management potential.
By focusing on mature companies with proven business models that generate excess cash – cash returned to shareholders – versus investing in more speculative businesses, dividend equity strategies have earned a well-deserved reputation for adding stability and growth to investors’ portfolios. Sure, they may be considered humble and less exciting compared to growth equity strategies, but not every investor seeks the thrill of a roller coaster ride. Sometimes, the steady and reliable merry-go-round is all you need.
After identifying the need among our clients for an income-generating equity investment, we conceived our own dividend strategy – one that leverages our expertise in value-oriented investing and seeks to deliver above-market returns while reducing volatility for investors.
We kept all the things investors like about dividend equity investing then improved upon the strategy by adding more flexibility.
We kept all the things investors like about dividend equity investing then improved upon the strategy by adding more flexibility. We felt we could maximize the benefits of dividend investing by having the flexibility to adapt to changing market conditions and seize opportunities other managers might overlook.
Why Should Investors Care About Flexibility?
Flexibility enables diversification, which is a key strategy for managing investment risk. By managing dividend yield at the portfolio level rather than focusing on the dividend yield of individual stocks, we’re able to own stocks that conventional dividend equity strategies cannot, including non-dividend-paying stocks.
By our mandate, if a company’s business model, profitability, cash flow, and earnings meet our criteria and the company returns capital to shareholders through share repurchases or debt reduction, it’s a candidate for investment – even if it doesn’t pay dividends. In fact, in several instances, non-dividend-paying stocks held in the portfolio have transitioned to paying dividends, validating the effectiveness of our flexible strategy.
Dividend Yield at the Portfolio Level
Source: Bloomberg
Investing for Dividend Growth
Like many dividend equity investors, we prioritize dividend growth. However, where we differ is that we don't adhere to rigid screening criteria that exclude companies which haven't consistently raised their dividends or have lowered them.
For instance, one of our portfolio holdings maintained a steady quarterly dividend of $0.10 per share for four years before announcing a 250% increase to $0.25 per share. Traditional dividend growth strategies might have excluded this stock due to its initially stagnant dividend, but our flexible approach allowed us to capitalize on this substantial increase.
This differentiated approach had delivered differentiated returns. Over the past five years, Dana’s Concentrated Dividend Equity Strategy has achieved approximately 49% cumulative dividend growth, significantly outperforming the 13% dividend growth of the Russell 1000 Value Index.
Source: Dana Investment Advisors, FactSet Research Systems
Navigating Economic Dislocations
Flexibility is also advantageous during economic dislocations that force some companies to lower dividends. While the strict mandates of conventional dividend equity strategies often prevents them from investing in these companies, our flexible approach allows us to retain or even buy their stocks if we believe their long-term earnings potential remains intact.
This process has been validated time and time again, most recently following the pandemic-related market rout. When the market plunged in 2020, we bought select stocks within financials and energy—two sectors hit hardest—at prices we deemed attractive and because we had confidence in their recovery potential. Our confidence in these and all our portfolio holdings was rewarded with a portfolio dividend yield that decreased less than the Russell 1000 Value Index during the pandemic and rebounded more swiftly after the pandemic.
Like all our investment strategies, Dana’s Concentrated Dividend Equity Strategy seeks to deliver above-market returns with less volatility. With a uniquely flexible investment process that includes managing dividends at the portfolio level and pursuing dividend growth without rigid restrictions we believe the Strategy can deliver higher income and better risk management, ultimately benefiting our investors through superior long-term performance.
Check out this recorded interview with Portfolio Manager Mike Alkhazov to learn more about our Concentrated Dividend Equity Strategy.
