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Investing Specialists

Generating Buy Ideas with Columbia Dividend Income

We've uncovered some stock ideas sifting through the portfolio of one of our top managers.

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By Alan Rambaldini | Stock Analyst

When selecting managers to include in our Ultimate Stock-Pickers' Investment Manager Roster, we tend to favor not only managers who have achieved great long-term investment performance, but also managers who share our value investing philosophy. Within that framework, however, we've been willing to allow for a much wider degree of latitude. For instance, some managers might focus more on small-cap stocks, while others may focus on large caps, domestic stocks, international stocks, etc. Of the managers we currently track, the team at  Columbia Dividend Income  (LBSAX) believes that superior performance comes from the return provided by dividends. Much like we did with our recent article on  The Jensen Fund (JENSX), we took a look at Columbia's investment approach and cross-referenced it with Morningstar's own stock research to generate some investable ideas.

Columbia Dividend Income Investment Approach
Judging by the name, it's obvious that the fund focuses on dividend-paying stocks. What is not obvious is that the focal point is not necessarily on yield, but on the free cash flow that can be returned to shareholders either by increasing dividends or repurchasing shares. To determine a specific company's ability to increase the cash it returns to shareholders in the future, the fund looks not only for a historical record of dividend growth, but also for balance sheet strength and free cash flow quality. Their approach has some merit, given the historical outperformance (over the last 30 years) of dividend-paying stocks over those that have not paid a dividend. We believe this record of outperformance can likely be attributed to the fact that paying dividends forces the management of a company to be disciplined with its capital, which bodes well for long-term shareholder value creation.

The Morningstar Ultimate Stock-Pickers Team does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.