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2 Different Approaches to Selecting Dividend-Payers

Thu, 28 Apr 2016

American Century Equity Income and Columbia Dividend Income have both provided a smooth ride for yield-seeking investors, says Morningstar's Gretchen Rupp.

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Video Transcript

Gretchen Rupp: American Century Equity Income and Columbia Dividend Income have both achieved success in their large-cap value investment universe. These actively managed funds are Silver-rated and led by seasoned investment professionals.

Phil Davidson has led Equity Income for more than 20 years whilst Scott Davis has guided Dividend Income since 2001. Both funds hold a similar number of stocks, about 80 to 100, with about 30% of the funds' assets in the respective top 10 holdings. They each require that their holdings pay a dividend and they will also buy other securities including preferred shares and convertible stocks.

Both managers focus on fundamental analysis. While Davis' approach differs slightly in that he is more focused on the predictability of a company's healthy cash flow growth in order to predict dividend payments, Davidson selects from a well-defined pool of about 500 stocks and looks for companies with solid returns on capital, low debt levels, and strong barriers to entry.

Still Davis demonstrates slightly more patience because about half of his portfolio's assets as of February 2016 have been holdings for more than five years. So, while both managers stick to high-quality, well-run companies, Davis' slightly lower turnover ratio has contributed to more attractive aftertax returns.

Generally, over the past decade Columbia Dividend Income has participated in a little more of capturing upside gains when markets rallied, while American Century Equity Income has had a lower down capture ratio, meaning it has held up better during down months than Dividend Income. But both funds' Sortino ratios topped their categories over their respective tenures and they've provided a smooth ride for investors looking for some additional yield.

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