Corporate dividends mattered to Brian C. Rogers even when they were out of style.
“Three years ago, dividends were considered passe, almost a sign of corporate weakness,” said Rogers, the manager of the $11.5 billion T Rowe Price Equity Income Fund (PRFDX) fund since its inception in 1985. “Now, dividends are in vogue again.”
He said that he expects more companies to pay dividends as part of their corporate finance strategies, prompted in part by the recent tax cut, which reduced the top rate on dividends to 15%. “As investor sentiment continues improving and investors move back into stocks,” he said, “they’ll place an increasing emphasis on the income parts of their portfolio.”
As of the end of July, the companies in the fund yielded an average of 2.6%, annualized, versus 1.8% for the Standard & Poor’s 500-stock index.
To pick the approximately 115 stocks in the fund, Rogers conducts a weekly screen of about 1,000 American companies with market capitalizations of at least $2 billion.
He looks for companies with solid records of paying above-average dividends. These stocks tend to weather falling markets better than other stocks, he said, and the dividends tend to reduce price volatility.
He also searches for companies with low price-to-earnings ratios. In June, the portfolio companies traded for an average of 15.7 times projected 2003 earnings, compared with a multiple of 17.5 for the index, he said. The screens also take into account price-to-sales ratios, to help him find valuation anomalies, he said.
Based on these screens, Rogers researches about 100 to 150 companies to assess why their stock prices are cheap — and the chances for improved performance over the next two to three years.