A focus on dividends and cash flow by Royce Funds. See the video here.
When it comes to dividends, we don’t focus on yield. Instead, we look for companies that have the ability to raise excess cash and a history of paying dividends at a modest rate.
“In my former life I had done a paper that showed that if you keep interest rates constant, which is a big if, of course, any asset—whether it’s a stock, or an oil well, or a piece of real estate—that throws off more cash is worth more because, obviously, if interest rates are constant the multiple is constant. So, a constant multiple times an increasing cash flow is more valuable. And it’s just sort of common sense. You know, if you’re getting more… even if the stock does nothing and the dividend increases, that portion of total return that comes from income is rising.
It also goes to the kind of quality company I like buying. I want companies that generate this excess cash flow. I’m trying to find companies that have the capability and the interest in raising dividends. I’m not trying to buy high yielders, I’m trying to buy companies that pay dividends and maybe of modest rate.”
“The companies that are these dividend aristocrats and the big names that everyone knows—3M, Minnesota Mining, Johnson & Johnson, Emerson Electric—these are all high-quality companies and they all have, in some fashion, a niche, a franchise, and the issue is buying them at the right price.
We have worldwide, and particularly in the United States, an increasing group of people that are retirees and seeking income, and the alternatives just aren’t there. So the issue is can you or do you want to own a portfolio of stocks that will pay hopefully rising dividends, and hopefully you’ll make some money on the portfolio also.”