A quality-first approach pays dividendsContributor 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.