The search for sustainable dividend payers in an unpredictable market - J.P. Morgan Asset Management

The search for sustainable dividend payers in an unpredictable market

Contributor Clare Hart

With an economy that’s not too hot but not too cold, the environment for stock pickers is just right. Clare Hart, Portfolio Manager for the JPMorgan Equity Income Fund, explains how her focus on seeking out high-quality dividend-paying companies can reap benefits in today’s environment, 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, with the potential for a bounce in corporate profits this year, 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. Across the banking industry we’re finding opportunities across both large banks and regional banks. A regional bank we particularly like is BB&T, a southern-focused franchise with a high dividend yield. BB&T maintains a diversified business model on a product and a geographical basis, which should reduce earnings volatility, while it has augmented its organic growth with well-thought-out acquisitions that complement its existing geographic footprint. As a result, BB&T is focusing on growing its franchise in states with steady population growth, such as Florida and Texas, while expanding into new markets in the south and Midwest.

We’re also finding pockets of opportunity within high dividend-yielding sectors, such as consumer staples, utilities and REITs. However, 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 Quantitative Equity Research. Data from 1/1/90 through 6/30/16. Each yield/payout ratio illustrates compounded total returns: price appreciation and dividend payout. The benchmark is the equal-weighted Russell 1000 Value Index. The chart is designed to illustrate that companies with a high yield and low payout ratio have outperformed, historically. Chart figures do not represent investable vehicles as each category is rebalanced monthly. Shown for illustrative purposes only.

How are you finding value in volatile sectors?

In more volatile sectors, such as energy, we focus on seeking out companies that can return capital to shareholders throughout the cycle. For example, we like to own high-quality established names, such as Exxon Mobil and Chevron, which have strong balance sheets and can survive the persistent volatility in the oil market, while also being in a position to benefit when oil prices eventually stabilize.

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 3M and Honeywell—which are 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?

In today’s market, which we believe will strengthen as the year goes on and as we move into next year, it’s an ideal environment to seek out companies that can grow their business and add shareholder value. 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, learn more about how JPMorgan Equity Income Fund can boost returns in today’s challenging environment.

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.

SELECTED RISK: The price of equity securities may rise or fall because of changes in the broad market or changes in a company’s financial condition, sometimes rapidly or unpredictably. These price movements may result from factors affecting individual companies, sectors or industries selected for the Fund’s portfolio or the securities market as a whole, such as changes in economic or political conditions. Equity securities are subject to “stock market risk,” meaning that stock prices in general (or in particular, the prices of the types of securities in which a fund invests) may decline over short or extended periods of time. When the value of a Fund’s securities goes down, an investment in a Fund decreases in value.

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