article 10-07-2014

Why consistency and not high yield? Our contrarian view on dividends...

As we move into the final quarter of the year, we are hearing a lot about dividends. A recent Financial Planning article published on September 24, 2014 listed the "Biggest Dividend Payers of 2014," a group of the "10 biggest dividend payers according to the S&P Dow Jones Indices."

Joseph Lisanti, the piece's author, points out that the companies which pay the largest dividends are all large-cap businesses—as seems reasonable. In the domestic small-cap universe, there are more than 4,000 companies that pay dividends and more than 11,000 on the international side.

We have two Featured Funds that look for dividends—Royce Total Return Fund seeks them in the small-cap space while Royce Dividend Value Fund scours the small- and mid-cap universes. While the portfolio does not specifically focus on dividends, Royce Special Equity Multi-Cap Fund invests primarily in mid-cap and large-cap companies and holds a number of dividend payers.

What these funds share in common is a belief that when it comes to dividends, size is not the important thing. Chuck Royce and Jay Kaplan, who co-manage Royce Total Return and Dividend Value Funds, and Charlie Dreifus, who helms Royce Special Equity Multi-Cap Fund (as well as Royce Special Equity Fund), all agree that understanding how the income stream fits in with a company's overall culture and operations is far more important than looking for companies with the highest dividend yields.

When it comes to dividends, we don't focus on yield. Instead, we look for companies with the ability to raise excess cash and a history of paying dividends—even if it's not at a high rate.

As Charlie says, "I want companies that generate 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, maybe at a modest rate.

"The companies that are these dividend aristocrats are big names that everyone knows—3M, Microsoft, 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."

(Two of Royce Special Equity Multi-Cap Fund's holdings as of 9/30/14 were on the financial-planning.com list—Microsoft and Apple.)

Important Disclosure Information

All data in the article referenced in this piece is as of September 17, 2014. Dividend per share adjusted for stock splits. Sources: S&P Dow Jones Indices and company websites.

Francis Gannon is Co-Chief Investment Officer and Managing Director of Royce & Associates, LLC, investment adviser to The Royce Funds. Mr. Gannon's thoughts and opinions expressed in this piece are solely his own 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.

Royce Total Return Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. The Fund may invest up to 25% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing Foreign Securities" in the prospectus.)

Royce Dividend Value Fund invests primarily in small-cap and/or mid-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund's broadly diversified portfolio does not ensure a profit or guarantee against loss. The Fund may invest up to 25% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)

Royce Special Equity Multi-Cap Fund invests primarily in mid-cap and large-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) In addition, as of 6/30/14 the Fund held a limited number of stocks, which may involve considerably more risk than a less concentrated portfolio because a decline in the value of any one of these stocks would cause the Fund's overall value to decline to a greater degree. The Fund may invest up to 25% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)

The S&P Dow Jones Indices is a joint venture between McGraw Hill Financial, the CME Group, and News Corporation. It produces, maintains, licenses, and markets stock market indices as benchmarks and as the basis of investible products, such as exchange-traded funds (ETFs), mutual funds, and structured products.

As of 9/30/14 Microsoft Corporation represented 4.81% and Apple represented 2.64% of the net assets of Royce Special Equity Multi-Cap Fund.

There can be no assurance that any of the securities mentioned in this piece 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.

Insights & News

Share:

Subscribe:

Sign Up

Follow: