The gains of internet-related stocks in recent years have cast a shadow over what a dull but steady income stream from dividends can do for investors.
Fully understanding a company's ability to generate cash and sustain stock buybacks and payouts to shareholders over time is the bedrock philosophy at Epoch Investment Partners, which oversees about $20.7 billion using this investment strategy.
"Boring is amazing, we take it as a compliment," Kera Van Valen, a portfolio manager of both the U.S. and global equity shareholder yield portfolios at Epoch, told the Reuters Global Investment 2019 Outlook Summit in New York on Tuesday.
"In our strategy we don't focus on multiples," Van Valen said, referring to price-to-earnings ratios that are an investing benchmark on Wall Street. "From our perspective it's more about the dividend yields that the companies offer."
The surge of the FANG stocks - Facebook Inc (NASDAQ:FB), Amazon.com Inc (NASDAQ:AMZN), Netflix Inc (NASDAQ:NFLX) and Google's parent Alphabet (NASDAQ:GOOGL) Inc - has captivated Wall Street in recent years, but they don't pay dividends so Van Valen has not rode that wave.
"You could understand the growth in some of the companies, some it's harder to understand," she said.
But Van Valen is very interested in technology as long as she can understand how it is driving cash flows to return to shareholders or reinvested to spur a company's growth.
"It's a great thing because we'll continue to see companies be able to sustain higher dividend payout ratios, be able to return excess cash to shareholders through share repurchases," she said.
About two-thirds of the 100 companies that each portfolio holds increased their dividends 7.1 percent so far this year, Van Valen said.
That rate was higher than last year, partly due to U.S. tax reform, but Van Valen does not expect the rate to change dramatically for her holdings in the near future even as earnings growth likely slows to single digits.
Van Valen looks for managements that have a well-articulated capital allocation policy so as the company grows, the cash distributions back to shareholders will grow. The average holding period for stocks in the two portfolios is about five years with low turnover.
The shareholder yield portfolios include utilities, staples, telecoms and increasingly financial stocks that profit from traditional loans and not harder-to-understand trading desks.