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Portfolio > Portfolio Construction

Dividends and Stock Price Make Winning Combination: Envestnet Webinar

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“Finding Yield Through Equities,” an Envestnet Market Morning webinar held Thursday, offered a look at some strategies from Carol Lippman, managing director of Dearborn Partners, and Mariana Bernunzo Connolly, head of client portfolio management, J.P. Morgan Asset Management. Both espoused the use of dividend-paying stocks as a means of adding yield to a client portfolio.

Lippman pointed out that investors are avoiding the market in the wake of the financial crisis, although stocks are, and have been for some time, on the rise. Companies with growing dividends, she demonstrated, have provided a better average annual return over the last five years in each sector of the S&P 500 than those that relied on growth alone.

Lipmann introduced Dearborn’s rising dividend strategy, in which the company looks for stocks that have a stable dividend, an attractive current yield, and the likelihood of consistent dividend increases. Companies that offer good dividend yield but with little prospect of yield growth are not considered candidates for their portfolio.

Other factors considered before a company is included in the portfolio are sound fundamentals; a defensive business; a habit of putting the bulk of its earnings back into the business for growth; no need to borrow; and a dividend growth rate that exceeds the rate of inflation. If a stock is no longer able to meet these criteria, it can be removed from the portfolio.

As examples of companies that provide dividend growth over the long term, she cited Chubb Corp. (CB), Coca-Cola (KO) and Kimberly-Clark (KMB).

Connolly said that while many people think of companies that offer dividends as stodgy and not as sources of great returns, neither is true; she pointed to Apple (AAPL) and Altria (MO) as examples demonstrating the difference in total yield provided by dividend-paying and non-dividend-paying companies. While Apple, which just recently declared a dividend, has provided an annualized total return of 16.81% over its lifetime (it went public on December 15, 1980), over the same period dividend-paying Altria provided an annualized total return of 20.34%.

Connolly said that low volatility was more important than ever and that she looks for a consistent pattern of earnings. A high return on capital, coupled with low leverage and strong cash flow, are important factors; so is a minimum yield of 2% for a stock to be considered for the portfolio. It must also be able to provide at least 100 basis points more in yield than the average for the S&P 500, and have room to grow. A combination of those factors provides a portfolio with less volatility and more downside protection.

As an example, she cited Hershey (HSY), which holds 42% of the chocolate market in the U.S. and has some immunity to recession. As she pointed out, people may not have bought a new car, but they still bought Reese’s Peanut Butter Cups.

Both agreed that utilities were currently overpriced, with Lipmann saying there were opportunities in consumer discretionary companies and energy, and Connolly citing consumer staples—adding that those followed the strategy of differentiating between needs and wants. Companies that provide needs are more attractive than those that merely cater to wants.


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