A quality-first approach pays dividends - J.P. Morgan Asset Management

A quality-first approach pays dividends

Contributor Clare Hart

With the stock market near all-time highs, investors are rightly concerned about a potential market correction. At this point in the market cycle, valuations are above average, rates are poised to rise and, while we believe that growth will continue, uncertainty abounds. Clare Hart, Portfolio Manager for the JPMorgan Equity Income Fund, explains how her focus on seeking out high-quality dividend-paying companies can provide investors with a conservative, lower-volatility way to participate in U.S. equity markets, and tells us where she is currently finding her most attractive stock ideas.

Why does an income-oriented approach make sense in today’s environment?

Dividend investing is an attractive way to capture return throughout the market cycle. If you’re investing for the long term, you should consider stocks with both growth in their underlying business and an above-market dividend yield. We have found that over time this combination allows an investor to capture both sources of a stock’s return—capital appreciation and dividend income. Today’s steady economic backdrop, coupled with increasing corporate profits, is a great environment for a stock picker to identify attractively-valued companies that can grow their business.

Where are you currently finding your most attractive opportunities?

Some of our highest-conviction positions are financial stocks, where reduced expectations for interest rate hikes this year are creating bargains by causing investors to exit names in the sector. A bank that we particularly like is Bank of America, a large money center bank with a national branch footprint and a leader in commercial lending, consumer finance and wealth management. We believe that Bank of America’s diversified business model should reduce earnings volatility, while its capital markets and investment banking revenues are economically sensitive and will do well as the economy continues to expand. The company also has a strong balance sheet, and should continue to return capital to shareholders via meaningful share buybacks and dividend increases.

While we’re finding pockets of opportunity within high dividend-yielding sectors, such as consumer staples, utilities and Real Estate Investment Trusts (REITs), valuations are rich, payout ratios are higher, and growth opportunities for the businesses tend to be lower. Therefore, the potential total return from investing in companies with attractive dividend yields and lower payout ratios, such as financials, is much better. Our focus on identifying stocks with a modest payout ratio is a key part of our investment process, as these companies retain enough capital after paying dividends to invest for future growth, providing us with both a growing stream of dividends and capital appreciation potential.

Source: J.P. Morgan Asset Management; data from 1/1/90 through 3/31/17. Each yield/payout ratio illustrates compounded total returns: price appreciation and dividend payout. Benchmark: Equal-weighted Russell 1000 Value Index. Chart designed to illustrate that companies with a high yield and low payout ratio have historically outperformed. Chart figures do not represent investable vehicles. Each category is rebalanced monthly. Shown for illustrative purposes only.

How are you finding value in volatile sectors?

Our focus on companies with strong balance sheets and the ability to generate meaningful cash flow has served us well as we have seen a return of volatility in the energy and materials sectors this year. In these more volatile sectors, we focus on seeking out companies that have strong balance sheets, solid cash positions, attractive growth profiles, and that can return capital to shareholders throughout the cycle. In the energy sector, companies such as Chevron and Occidental Petroleum, whose strong balance sheets enable them to weather the persistent volatility in the oil market, while also providing their shareholders with attractive returns in the form of dividend yield and capital appreciation, are among our top holdings.

Industrials is another volatile sector, where we are able to find high-quality companies that operate in longer-cycle, higher value-add industries. Companies like Dover Corporation—which is able to deliver products with technological advances into more traditionally-cyclical end markets—can be longer-term winners.

Why should investors consider this high-quality approach to value investing?

We believe that over a cycle, investors should look to capture both forms of equity return—capital appreciation and divided yield. With the prospects for multiple expansion limited, it’s an ideal environment to seek out companies that can pay an above-market dividend yield and grow their business. And an investment approach that blends income investing with capital appreciation can not only seek out these attractive opportunities, but also lead to a fund with lower volatility than the broader market.

With its income approach to equities focusing on high-quality companies with healthy and sustainable dividend yields, the JPMorgan Equity Income Fund may help boost returns with lower volatility.


The following risks could cause the fund to lose money or perform more poorly than other investments. For more complete risk information, see the Fund’s prospectus.

The prices of equity securities are sensitive to a wide range of factors, from economic to company-specific news, and can fluctuate rapidly and unpredictably, causing an investment to decrease in value.

There is no guarantee that companies will declare, continue to pay or increase dividends.

Related funds

Equity Income Fund
The Equity Income Fund focuses on high-quality companies with healthy and sustainable dividend yields, providing a conservative way to participate in U.S. equity markets.