As an investor in one of our internally managed Dividend Growth Equity Strategies, we wanted to update you on the way we are analyzing stocks in the current market and what we are looking for on the horizon.
Back in April, we shared with you our thoughts that balance sheet flexibility and strength would be vital moving forward, particularly for strategies focused on avoiding dividend cuts and untimely equity issuance.
At the time, we additionally reiterated the tenants to our process including the sale of any stock that cuts its dividend and/or we believe will make an impending cut to its dividend. We can report that during the second quarter none of our portfolio companies announced a suspension or reduction of their regularly scheduled dividend payments. That stands in stark contrast to the broader US Markets. Through May 4th, 44 S&P 500 companies had cut their dividend according to Dow Jones Indices. In contrast, at least 57 companies had raised their dividend.
While the second quarter provided strong equity returns, we do not believe volatility has been vanquished from 2020 altogether. Instead, we believe that we are likely to see “Fits and Starts” around an upward trending market. For dividend income investors, we believe that these bouts of volatility will provide extremely compelling entry points as dividend yield moves up as price moves down, all else being equal. With short term rates set by the Fed anchored at 0% likely through 2022, and the market set 10 Year Treasury spending considerable time below 0.75%, we believe Dividend Growth Stocks remain one of the best places to generate income in the Financial Markets. As a hypothetical example, if a stock were to have a 3% starting yield and grow their dividend by 6% a year, that company would generate over 5 times as much income over 10 years as a 0.75% coupon bond. Importantly, stocks have no maturity date, and are lower in the capital structure than a bond in the event of a bankruptcy, but we believe this gap offers opportunities to long term investors with the risk tolerance and investment objectives in line with owning stocks.
In addition to current yield, we continue to focus on future dividend growth. Importantly, we believe that the long-term growth, and corresponding dividend growth, of our portfolio companies will prove largely un-impacted by the pandemic. The themes such as 5G networks, digitization of the workforce, and e-commerce that were in place coming into 2020 have been accelerated, however we additionally believe that the previous long-term trends of growth in the consumer discretionary sector (apparel, food, home improvement, etc.), aerospace, and defense will continue; although it may take some time to regain previous 2019 levels in those areas.
With US Stock Market returns approaching +20% in the second quarter, certainly some amount of recovery has already been “priced in”. That being said, the recovery has been uneven with Technology companies trading largely at all-time highs and industrial and financial companies trading in many cases 20% or more down from the highs. Provided we continue to see vaccine progress moving towards a mass inoculation available in the First Quarter of 2021, we believe the next leg of the markets is likely to see increased participation in the harder hit areas of the markets; specifically those companies that have remained well capitalized such as those we aim to own.
With the start of the new quarter, we turn our eyes to Earnings Season which will begin in earnest with the banks around July 14th. We are looking forward to un-packing the earnings reports and conference calls in our efforts to continue investing in companies capable of generating the revenue, cash flow, and dividend growth over time.
Q3 2020
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. No strategy assures success or protects against loss. Investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any time. All indices are unmanaged and may not be invested into directly
