The nearly two-year trend of companies' hoarding cash due to economic uncertainty plays right into the hand of Clare Hart, manager of the $560 million JPMorgan Equity Income Select Fund Ticker:(HLIEX).
For a lot of companies, the cash buildup has resulted in increased dividends and/or stock repurchase programs, which ultimately broaden the universe of potential stocks for Ms. Hart's portfolio.
“The cash has been building for the past 18 months to two years because companies are afraid to invest,” she said. “We're seeing companies increase their dividends, but we're also seeing a lot of them resort to stock buybacks.”
Ms. Hart, who has managed the fund for nine years, has consistently met her target of keeping the portfolio's
dividend yield at least 100 basis points above that of the S&P 500. “We look for good companies with good cash flow, good management teams, and we also want a
dividend,” she said.
Emphasizing the point that dividends have accounted for about 40% of the total return of stocks dating back to 1929, Ms. Hart won't buy any stock without a
dividend yield of at least 2%.
“A lot of people want to go back to the 2000 period when it was all about appreciation, but in a more normal environment, total return is what you need to think about,” she said. “People also have stories of [acquisitions] that drove a stock price up 40%, but nobody has a portfolio full of takeover targets.”
Ms. Hart's steady process isn't about investing in those companies paying the highest dividends; it's more about dividends in the context of a solid sector and companies with enough of a competitive advantage to also generate some stock price appreciation.
“It's okay with me if I don't get every [potential
dividend] out of a company, because you can't rob a company of every penny,” she said. “We will give up some yield if I think there's upside in the stock.”
And, of course, when a stock price rises, the
dividend yield will correspondingly fall. “That's the rich man's problem,” she added. “But when the market is down as much as it has been, lots of stuff starts to meet that 2%
dividend yield requirement.”
The fund, which has a five-star rating from Morningstar Inc., is down 3.4% from the start of the year. Over the same period, the S&P is down 6.6%, and the Morningstar large-cap-value category average is down 8.6%.
Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.
