One of the keys to successful dividend investing is separating the wheat from the chaff—finding stocks with secure payouts that can grow consistently and over the long haul.
Some of the highest-yielding shares, though tempting at first blush, can lead to trouble, notably cuts or suspensions and big capital losses.
Picking equity-income stocks got even tougher early in the pandemic last year when stalwart dividend payers like
Southwest Airlines
(ticker: LUV),
Boeing
(BA), and
Walt Disney
(DIS) suspended their payouts to preserve capital.
Though overall dividend health has improved markedly since then and looks good heading into 2022, it’s important to keep quality in mind. However, pinpointing what separates such stocks from the rest of the pack can be tricky, given the subjective nature of defining quality.
Barron’s spoke to three money managers for guidance, and to learn about some of their favorite dividend stocks.
A quality payout “isn’t only sustainable but preferably can grow over time,” says Mike Barclay, a senior portfolio manager at Columbia Threadneedle Investments. “It’s one of the reasons we don’t focus on yield,” he adds. Barclay is a manager of the $39 billion
Columbia Dividend Income
fund (LBSAX). As of Oct. 31, its top holdings included
Microsoft
(MSFT),
JPMorgan Chase
(JPM), and
Johnson & Johnson
(JNJ).
A dividend yield, Barclay says, “is just a formula” and “it really doesn’t tell you about the health of the company or the ability to pay that dividend in the future.”
Steve Goddard, founder and chief investment officer of the London Co., which manages money in separate accounts, prefers companies with high returns on capital and strong balance sheets. “High return-on-capital companies usually by definition will generate a lot more free cash flow than the average company would,” he says. And cash flow is what pays the dividend.
As of this year’s third quarter, the Richmond, Va.-based London Co.’s equity-income strategy’s top 10 holdings included
Apple
(AAPL), which recently yielded 0.5%; chip maker
Texas Instruments
(TXN), 2.4%;
Microsoft
(MSFT), 0.7%; home-improvement retailer
Lowe’s
(LOW), 1.2%; and asset manager
…
Read More: How to Find the Healthiest Dividend Stocks for Your Portfolio
