Beyond yield: Franklin's Matt Quinlan on the case for dividend growth

Dividend investing is back in the spotlight, and Matt Quinlan, portfolio manager of the Franklin Dividend Growth ETF (FRIZ), tells InvestmentNews that the renewed focus reflects a search for resilience amid uncertainty.

“Elevated market uncertainty related to inflation and equity valuation concerns increases the appeal of companies with a consistent track record of growing dividends,” he says. “The ability to grow a dividend over time is often a signal of financial strength, management discipline and an ability to grow the business.”

He adds that such companies “tend to demonstrate resilience during volatile periods,” making them appealing to a wide range of investors.

While high-yield plays can deliver immediate income, Quinlan warns they sometimes indicate “underlying business distress or limited growth prospects.” For that reason, FRIZ focuses instead on firms with “strong business models and consistent free cash flow generation.”

“Though some of these dividend growth companies may provide lower current yields, we believe they can offer stronger total returns over time,” he says.

The portfolio manager stresses that quality is key and companies that raise dividends reliably, even during market downturns, typically exhibit robust business models, competitive advantages, and sound governance. But he cautions against value traps.

“While a company may have a history of growing its dividends, slowing revenue growth, excessive debt, or deteriorating margins are signs that it may not have a significant growth runway,” he says.

“Companies capable of sustaining and growing dividends in difficult markets often share several traits: diversified revenue streams, pricing power, conservative leverage, and adaptive business models.”

FRIZ’s roughly 40 holdings, Quinlan noted, reflect a balance between focus and diversification. “We believe diversification and conviction can co-exist,” he says, adding that the opportunity set is growing. “We are certainly starting to see younger and growth-oriented firms enter the dividend space as they reach more mature stages in their business models and generate cash flow with greater consistency.”

Dividend growth strategies, Quinlan believes, offer the best of both worlds, with the potential to provide short-term income while delivering long-term capital appreciation.

“These companies tend to demonstrate resilient business models and can weather market downturns more soundly as a result,” he says.

Ultimately, Quinlan views dividend growth as a long-term, through-the-cycle discipline.

“In rising markets, they participate in capital appreciation,” he says. “In volatile markets, they may continue to offer investors a reliable source of income. Dividend growth–focused equity strategies can provide an avenue to mitigate the impacts of inflation and offer the opportunity to compound wealth potential through an attractive combination of income generation and capital appreciation.”