Forget crying over low interest rates or taking on more risk in the fixed-income space for better yield, says portfolio manager Troy Shaver. He prefers to get his income from dividends.
Mr. Shaver, manager of the
Goldman Sachs Rising Dividend Fund Ticker:(GSRAX), leaves little to chance when it comes to investment income.
The strategy, which he has managed since the fund was launched in March 2004, begins with the basic and rigid premise that each holding must have at least a 10-year track record of increasing dividends by at least 10% annually.
While the research becomes fundamental once the initial screen is applied, Mr. Shaver said he has identified about 100 companies that meet the basic criteria.
“We're looking at things like the quality of management, as well as historic and potential acceleration of earnings when evaluating a company,” he said. “And we're always looking for the cause of earnings growth, because
dividend growth is linked to earnings growth.”
Once a stock makes the grade and is added to the portfolio, Mr. Shaver tends to hold on for a long time, unless of course the payout drops below the required 10% annual increase or — the kiss of death — cuts its
dividend.
“If a company cuts its
dividend, we sell it immediately,” he said.
Some of the companies that have stood the test of time include International Business Machines Corp. Ticker:(IBM), McDonald's Corp. Ticker:(MCD), and Denmark-based pharmaceutical giant Novo Nordisk A/S Ticker:(NVO).
IBM has met the 10/10 requirement for the past 16 years, with an average 10-year
dividend increase of 18.6%. McDonald's has increased its
dividend by an average 29% over the past 10 years and has increased its
dividend for the past 34 years. And Novo Nordisk's 10-year average increase is 22.7%.
“Our average holding is gaining market share and it's usually the leader in its industry,” he said.
The portfolio of 30 stocks, including a 15% allocation to non-U.S. companies, also has a 19% weighting in master limited partnerships, which Mr. Shaver described as a “good source of current income.”
The fund, which has a four-star rating from Morningstar Inc., has gained 6.9% from the start of the year.
That compares with a 12.2% gain by the S&P 500 and a gain of 12.1% from Morningstar's large-cap-growth category.
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