Fund managers Bryan Keane and Andrew Kohl discuss their strategy for identifying stocks with accelerating dividend payouts. They tell MoneyShow.com about two of their picks, and explain why those stocks are so strong.
Kate Stalter: I'm speaking today with Bryan Keane and Andrew Kohl of the Alpine Accelerating Dividend Fund (AADDX). Maybe you can start today by telling us about your fund's objectives and your investment philosophy?
Andrew Kohl: Sure. We are an income fund with a global mandate. We look at equity stocks in all market caps in all regions, and our main focus is finding good companies with steady cash flows that have the ability to grow their dividends and potentially accelerate the payouts over time.
Kate Stalter: Talk a little bit about the sector weightings within the fund. How you make those determinations?
Andrew Kohl: We're not trying to make big sector calls, so we're very aware of what the weights of the S&P 500 are, and by and large we're not trying to make big sector calls, like I said.
We do have overweights in utilities, where we obviously see stable dividend growth, and some other defensive sectors, but we try to deliver our return to shareholders by stock selections, rather than making big bets on sectors.
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Kate Stalter: So, really, it sounds like it's perhaps more of a bottom-up approach, rather than top-down?
Bryan Keane: Yes, it's definitely more of a bottom-up approach. I mean, we want to look for those companies, as Andrew mentioned, that have strong cash flows. That, in most cases, have low payout ratios, and potentially don't pay a dividend at the current time, but we believe have the ability to increase, if not accelerate those dividends.
Kate Stalter: Let's talk about some of these selections, and how you identify these names.
Andrew Kohl: Sure. One name that we like at the moment is BlackRock (BLK), which is one of the largest mutual-fund companies in the world. What we think is nice about them is: They've got this tremendous diversity in their assets under management between the different asset classes, as well as the geographies in which they invest and gather assets.
It's run by a world-class management team under Larry Fink, and they have a strong commitment to their dividends, which have been growing in recent years. And we expect continued increases in years to come.
Bryan Keane: Just as another example, a company where they hadn't paid dividends in the past but we expect to see the payout ratio increase over time, is American Tower (AMT).
Last year, at the end of the year, they converted to a REIT format. Under that format, they issued a special dividend at the end of 2011. We believe that given their stable cash flows, that are driven by long-term contracts and increasing cell site density, they should be able to increase those dividend payouts over time.
Kate Stalter: I've pulled up a chart for that one as you were speaking, and I noticed in addition to the dividend increases that you've been discussing, this one also has a nice price appreciation. Is that another factor in how you make your selection?
Bryan Keane: Yes, we're definitely looking for appreciation as well as income. Typically, many of our stocks do have a lower dividend yield, just because either they're newer to paying dividends, or they have lower payout ratios. So we're looking for that appreciation as much as the dividend income, as well.
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Kate Stalter: You talked about a couple of large-cap names. Do you also look at mid-caps or small caps, or are most of your holdings in the large-cap area?
Andrew Kohl: We have what we think is a pretty nice blend of large, mid, and small cap, compared to the S&P for example. So we do have companies with market caps of $200 million and $300 million, alongside the monsters that you referenced.
Kate Stalter: One of the things I recently asked another fund manager about, who is also known in the dividend space: Is there any sense that the dividend trade is maybe getting a little bit crowded? I know we're hearing some pundits saying that, especially after the New Year. What's your thought on that?
Bryan Keane: Well, I think especially in the fourth quarter, we saw the utility sector do particularly well.
I think what's different about our fund is that we're not necessarily buying and owning the traditional dividend payers. We're looking for names that are a little bit more broad-based than a traditional definition of a dividend company might be.
That gives us, we believe, a little bit more room, where if the market moves away from the dividend trade, that we're well positioned as well.
Andrew Kohl: Just to follow up on what Bryan said: The types of stocks that we want to find are the ones that have got years of earnings growth ahead of them, where they're going to be growing the dividend alongside their earnings.
It's not the kind of steady, slow, plodding, high-yielding names that have done so well lately. We might agree with you that that trade is getting long in the tooth.
Kate Stalter: Given the fact that the dividend trade really has gotten so much attention recently-and to what you're saying about identifying some of the unusual suspects, as opposed to some of the well-known names-what would be your advice for individual investors just trying to navigate continuing volatility as we go forward?
Andrew Kohl: I guess the advice we would have is, obviously, to have a diversified portfolio. But with regard to dividend strategies, in particular, we think that finding companies that are going to be able to grow their dividends, is going to provide you more safety over time than those that are just paying out a high current dividend income.
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Because ultimately, stocks go up when earnings go up, and if you've got a growing earnings stream with growing dividends, that's kind of the best combination.