Credit: Shutterstock photoMost investors recognize that dividends are a crucial component of total return. Dividend-paying stocks often outperform shares of companies that don't pay dividends, a perennial case for Growth & Income investing. This fund's mandate allows it to roam the entire capitalization spectrum, finding values in shares of large and small companies.-- The Editors .
Dare to Be Boring
Superstar fund managers and stock picking gurus perpetuate the myth that one must be a genius to generate returns in the market. But a consistent value strategy may in fact be enough. The approach employed by Aston/River Road Dividend All Cap Value (ARDEX) is elegant in its simplicity. Management focuses on companies with growing dividends and low debt, buying and selling shares of those companies at sensible prices.
The fund employs a methodical multi-step approach to selecting portfolio holdings. They favor companies with attractive business models and sustainable cash flow streams. But when it comes to the difficult work of separating the wheat from the chaff, management puts a premium on a company's dividend policy.
"A company's dividend policy is the best legal form of inside information there is," portfolio manager Henry Sanders said, nothing that a consistently growing dividend signals that a company is confident that its business is improving.
Sanders and the fund's management team prefer companies with a dividend of at least 2 to 3 percent, and, crucially, that have a history of growing their dividends. They then calculate an absolute value for the firm and buy only companies that trade at a discount to that value--usually 85 cents on the dollar.
"It tends to lead to fairly boring businesses, but that's OK," Sanders said. "If they're harvesting cash we don't care how boring they are."
The fund's holdings are a roll call of familiar large-cap names such as Automatic Data Processing ( ADP ) PepsiCo ( PEP ), ConocoPhilips ( COP ), McDonald's Corp ( MCD ), General Mills ( GIS ) and United Parcel Service (UPS).
The fund was in the top quarter of its Morningstar category for the past five years, and has outperformed the S&P 500 by 2.87 percent over the past three years. The fund's substantial yield of 2.43 percent provides a reliable income stream to complement its capital appreciation.
Management shepherded the fund through the worst days of the financial crisis; the fund finished 2008 in the top 10 percent of its category. But in early 2009, management sensed that a recovery was imminent and began to position the portfolio accordingly.
The fund established positions in companies such as railroad operator Norfolk Southern Corp (NSC) that would be on the front edge of an economic recovery. Management also made a bet that leading food distributor Sysco Corp (SYY) would benefit from an uptick in US economic performance.
Despite a rocky road in 2009, these bets paid off: The fund returned 21.33 percent for the year, compared to a 28.65 percent loss in 2008. Last year the fund continued its winning ways, posting an 18.59 percent return.
Aston/River Road Dividend All Cap Value has parted ways with some investments that had grown too expensive. The fund in December sold off its position in Yum! Brands (YUM), the operator of KFC and Pizza Hut restaurants.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Article Republished with permission from www.KCIinvesting.com and www.rukeyser.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
