article , video 03-13-2014

A Focus on Dividends and Cash Flow

When it comes to dividends, we don't focus on yield. Instead, we look for companies that have the ability to raise excess cash and a history of paying dividends at a modest rate.

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"In my former life I had done a paper that showed that if you keep interest rates constant, which is a big if, of course, any asset—whether it's a stock, or an oil well, or a piece of real estate—that throws off more cash is worth more because, obviously, if interest rates are constant the multiple is constant. So, a constant multiple times an increasing cash flow is more valuable. And it's just sort of common sense. You know, if you're getting more… even if the stock does nothing and the dividend increases, that portion of total return that comes from income is rising.

"It also goes to the kind of quality company I like buying. I want companies that generate this excess cash flow. I'm trying to find companies that have the capability and the interest in raising dividends. I'm not trying to buy high yielders, I'm trying to buy companies that pay dividends and maybe of modest rate.

"The companies that are these dividend aristocrats and the big names that everyone knows—3M, Minnesota Mining, Johnson & Johnson, Emerson Electric—these are all high-quality companies and they all have, in some fashion, a niche, a franchise, and the issue is buying them at the right price.

"We have worldwide, and particularly in the United States, an increasing group of people that are retirees and seeking income, and the alternatives just aren't there. So the issue is can you or do you want to own a portfolio of stocks that will pay hopefully rising dividends, and hopefully you'll make some money on the portfolio also."

Important Disclosure Information

Charlie Dreifus is a portfolio manager and principal of Royce & Associates, LLC, investment advisor to The Royce Funds. He serves as portfolio manager for Royce Special Equity Multi-Cap Fund (RSM) and Royce Special Equity Fund (RSE). The thoughts and opinions in the video are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. 

Percentage of Fund Holdings as of 12/31/13 (%)

  RSM RSE
3M Co. 2.27 0.00
Minnesota Mining 0.00 0.00
Johnson & Johnson 0.41 0.00
Emerson Electric 5.25 0.00

There can be no assurance that any of these securities mentioned in this interview will be included in these portfolios in the future. References to specific securities in this piece are not intended as recommendations and should not be relied upon as the basis for anyone to buy, sell, or hold any security.

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