Seeking Alpha

The Essentials Of Dividend Investing: A Conversation With 3 Dividend Investing Experts, Part 1 Of 2

by: Columbia Threadneedle Investments
Summary

We sat down with PMs Scott Davis, Mike Barclay and Pete Santoro to get their most relevant insights on dividend investing today.

There's certainly a misconception that you should focus on yield. But yield for the sake of yield is not a compelling strategy.

It really comes down to cash flow: a dividend can only be sustained and grown over time if cash flow grows over time.

By Scott Davis, Senior Portfolio Manager and Head of Income Strategies; Michael Barclay, CFA, Senior Portfolio Manager; Peter Santoro, CFA, Senior Portfolio Manager

We sat down with PMs Scott Davis, Mike Barclay and Pete Santoro to get their most relevant insights on dividend investing today. Part two, coming soon.

Who should think about investing in equity income?

MIKE BARCLAY: There are some obvious categories: for example, investors who are close to or in retirement and want their money to last through retirement. But even for younger investors, I'd say this is a way to have equity exposure with relatively low risk. Equity income takes a long-term approach to investing in the markets - including staying invested through down markets. So we'd argue that it should be a core part of every investor's portfolio - and they could use either higher beta or more risky strategies as satellites to capture upside in strong up markets.

What are the biggest misconceptions about dividend investing?

PETE SANTORO: There's certainly a misconception that you should focus on yield. But yield for the sake of yield is not a compelling strategy, and here's why: Just because a company has a history of paying dividends doesn't mean it will continue to do so. Dividends are not guaranteed by companies. They're issued at the sole discretion of the board of directors of an individual company. So look for companies that have the ability to pay and grow those dividends over time, providing income for investors going forward.

MIKE BARCLAY: I agree. The dividend is only going to be as good as the underlying fundamentals of the company. If fundamentals remain strong, the stock price will reflect that. What's really important is sustainable income that can grow over time.

SCOTT DAVIS: Whenever I hear that someone is using dividend yield as a valuation tool, it scares me. Dividend yield is a simple ratio: it's the current dividend paid divided by the price. There's very little information in that. It doesn't tell you whether the dividend can be sustained or anything about the cash flow or balance sheet of a company.

PETE SANTORO: A total return approach is the best way to go about it. Yes, dividends are a very important part of the total return structure - since 1930, over 40% of stocks' total return has come from dividends. But the other 60% is also important, and that's the capital appreciation.

How can investors find companies that can pay a dividend over time and continue to grow it?

MIKE BARCLAY: It really comes down to cash flow: a dividend can only be sustained and grown over time if cash flow grows over time. You need to ask: What pays the dividend? The other element that's really important is looking at the balance sheets, because in stressed environments, companies with the strongest balance sheets can access capital. They can sustain a dividend even if cash flows take a hit in a downturn. When a company is over-levered, it may have to make desperate decisions, and more often than not, it may have to cut its dividend. When you're thinking about sustainable and growing dividends, you have to focus on the cash flow, before you even worry about whether the dividend is going up or what the yield is.

Disclaimer

© 2019 Columbia Management Investment Advisers, LLC. All rights reserved.

Use of products, materials and services available through Columbia Threadneedle Investments may be subject to approval by your home office.

† By clicking the Glossary link above, you will be leaving columbiathreadneedle.com/us. View our Terms and Conditions for our hyperlinking disclosure.

With respect to mutual funds, ETFs and Tri-Continental Corporation, investors should consider the investment objectives, risks, charges and expenses of a fund carefully before investing. To learn more about this and other important information about each fund, download a free prospectus. The prospectus should be read carefully before investing.

Investors should consider the investment objectives, risks, charges, and expenses of Columbia Seligman Premium Technology Growth Fund carefully before investing. To obtain the Fund's most recent periodic reports and other regulatory filings, contact your financial advisor or download reports here. These reports and other filings can also be found on the Securities and Exchange Commission's EDGAR Database. You should read these reports and other filings carefully before investing.

The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Management Investment Advisers, LLC (OTC:CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that any forecasts are accurate.

Columbia Funds and Columbia Acorn Funds are distributed by Columbia Management Investment Distributors, Inc., member FINRA. Columbia Funds are managed by Columbia Management Investment Advisers, LLC and Columbia Acorn Funds are managed by Columbia Wanger Asset Management, LLC, a subsidiary of Columbia Management Investment Advisers, LLC. ETFs are distributed by ALPS Distributors, Inc., member FINRA, an unaffiliated entity.

Columbia Threadneedle Investments (Columbia Threadneedle) is the global brand name of the Columbia and Threadneedle group of companies.

NOT FDIC INSURED · No Bank Guarantee · May Lose Value

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.