Why Consistency And Not High Yield? Our Contrarian View On Dividends by Royce Funds
As we move into the final quarter of the year, we are hearing a lot about dividends. A recent Financial Planning article published on September 24, 2014 listed the “Biggest Dividend Payers of 2014,” a group of the “10 biggest dividend payers according to the S&P Dow Jones Indices.”
Joseph Lisanti, the piece’s author, points out that the companies which pay the largest dividends are all large-cap businesses—as seems reasonable. In the domestic small-cap universe, there are more than 4,000 companies that pay dividends and more than 11,000 on the international side.
We have two Featured Funds that look for dividends—Royce Total Return Fund seeks them in the small-cap space while Royce Dividend Value Fund scours the small- and mid-cap universes. While the portfolio does not specifically focus on dividends, Royce Special Equity Multi-Cap Fund invests primarily in mid-cap and large-cap companies and holds a number of dividend payers.
What these funds share in common is a belief that when it comes to dividends, size is not the important thing. Chuck Royce and Jay Kaplan, who co-manage Royce Total Return and Dividend Value Funds, and Charlie Dreifus, who helms Royce Special Equity Multi-Cap Fund (as well as Royce Special Equity Fund), all agree that understanding how the income stream fits in with a company’s overall culture and operations is far more important than looking for companies with the highest dividend yields.
When it comes to dividends, we don’t focus on yield. Instead, we look for companies with the ability to raise excess cash and a history of paying dividends—even if it’s not at a high rate.
As Charlie says, “I want companies that generate 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, maybe at a modest rate.
“The companies that are these dividend aristocrats are big names that everyone knows— 3M Co (NYSE:MMM), Microsoft Corporation (NASDAQ:MSFT), Emerson Electric Co. (NYSE:EMR) —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.”
(Two of Royce Special Equity Multi-Cap Fund’s holdings as of 9/30/14 were on the financial-planning.com list—Microsoft and Apple.)