7th May 2013
The rate of the rise in the US market may not continue at the same pace but dividends and earnings prospects remain a cause for optimism says Hersh Cohen, Co-Chief Investment Officer at ClearBridge Investments.
Cohen says: “The number and extent of increases that have already occurred this year have exceeded even our most optimistic views, reinforcing our long-held belief that owning quality companies with the ability to deliver rising income will continue to pay off.”
The firm says that several major names have announced dividend increases in the first part of 2013 including Apple, most recently, who’ve increased their quarterly dividend by 15%, Comcast which upped its distribution by 20%, Time Warner by 10.6% and Schlumberger by 13.6%. Other names increasing payouts include Kimberly-Clark, 3M, UPS, Nextera Energy, Texas Instruments, General Mills and Qualcomm. The latter boosted its dividend by 40%.
Cohen adds: “Perhaps most notably, Wal-Mart Stores increased its payout by 18.2% and has grown it every year since it began paying a dividend in 1974.”
ClearBridge is a long-term advocate of dividend stocks which it says fits with its philosophy of buying good companies at fair prices and holding them for long periods of time.
Cohen says companies paying higher dividends should also benefit from higher prices, although he warns against stretching for yield. “Higher-yielding instruments invariably have significantly higher risk and when you buy stocks, you are not buying them just for the dividend. Growth is a key component as well and when investors over-emphasise current yield and buy the highest-income stocks, they are ignoring the fact the real power of dividends over time is their ability to rise as part of a company’s long-term growth.”
He says the sectors he favours have firms with both income and growth such as consumer staples, high-quality diversified industrial sectors or technology.
Cohen also believes fears about recent dividend tax changes are overstated. “Putting some historical perspective on this, marginal rates have varied widely over the years – ranging from 90% to 28%,” he adds. “But many companies have continued to increase their dividends throughout those periods. Some, like Procter and Gamble, have been raising their distribution for decades and the point is that companies pay dividends for reasons that go beyond current tax policies.”