(Bloomberg) -- Paying dividends was once something that was more or less expected of big companies. These days, however, the dominance of growth firms that prefer to reinvest or buy back stock rather than give cash to shareholders means that five of the seven largest S&P 500 members pay no dividend at all.What would it take for companies like Amazon.com Inc., Facebook Inc., Alphabet Inc. and Tesla Inc. to take the plunge and pay a regular dividend? Chris D’Agnes, portfolio manager at Hamlin Capital Management, joined the “What Goes Up” podcast to discuss what could trigger a change, as well as his process for evaluating stocks with high-yielding payouts. He helps manage the equities strategy at Hamlin, an income-focused investment-advisory firm that oversees about $4.8 billion.
Below are some lightly edited highlights of the conversation.On the big tech and internet companies that are dividend holdouts:
“These companies will likely come around and start a dividend payment to shareholders. I would not be surprised to see that from Facebook or Google or some of the other big ones, as long as they have that free cash-flow and the wherewithal and capacity to do it. One thing you’re going to see is that the demographics of this country, we’re aging as a country and we need income. Seniors need income, retirees need income. It has gotten very difficult to find income anywhere. So why not demand from those big companies that they share some of the cash with their shareholders? I think you’re going to see that going forward. I think the demographics are going to really, really require it and ask for it.”
On the discipline of dividend payers:
“The way we think about it actually is that the dividend really imposes a lot of discipline on the company and the management team. And without it, you really can invest in just about anything you want. But if you’re committed to a dividend, if you’re committed to your shareholders and are going to pay that dividend, well you better deliver on it. And you know that your shareholders are going to want you to grow that dividend over time. And so you’ve got to really operate the business efficiently, make good decisions, make disciplined decisions. You just can’t invest in everything. That’s a very important concept of why this strategy has worked over time. It’s the governor on the capital allocation process. Eventually, maybe Amazon or Google or Tesla, especially maybe Tesla, will do something shareholders are not pleased with. And if they force the management team to implement that dividend, it’s going to be harder for them to do that.”
On how interest rates affect an equity income strategy:
“It’s really been a misnomer over time that dividend-paying stocks don’t like higher yields. There are certain groups within our universe, maybe more bond-proxy-like groups like utilities and REITs would be the obvious ones, that over time have not performed as well maybe during a brief period of rates moving up. But actually we really want rates to go higher. We think low rates have been a huge headwind for our strategy. It has been a big tailwind for growth stocks with such a low-rate environment. Higher rates generally mean better growth, more inflation. And dividend-paying stocks, companies that are paying out a dividend and want to grow that dividend, they want more inflation. They want to be able to raise prices on their products and services because then they can pass that through in the form of faster earnings growth, faster dividend growth.”
On dividend opportunities that do exist in tech, especially chipmakers:
“With technology and the chip stocks, there’s just been a lot to look at there because those companies are well-run with lots of cash flow and great balance-sheets. So the starting point is really good. And there are so many really good and strong secular growth drivers right now. As technology advances, whether it be in the automobile or industrial sectors, as things become a little more autonomous and automated, these are almost staples types of companies. They’re products you have to have, and there’s endless demand drivers for them.
That was really shown throughout 2020. We really needed chips and semiconductor companies more than ever. So much so that right now you’re hearing in the news about shortages. We don’t have enough of them for the auto industry and for some other industries. That’s how significant the demand is. You mentioned Qualcomm and Broadcom. Those are two companies we’ve owned for a while, Qualcomm for years. And you can imagine how out of favor that might’ve been at some point over the last couple of years as it was going through the FTC case and its disagreement with Apple. So just a stock that had gotten very cheap, with a very bright future. So that was purchased at a pretty high yield a couple of years ago. Similar with Broadcom, purchased at a pretty high yield in 2019.”
On choosing which market sectors to focus on:
“These sectors come and they choose us.”
Click this link to listen to the entire podcast on Megaphone.
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