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A Solid Choice for Income Seekers

Silver-rated Columbia Dividend Income boasts stable leadership and a well-defined approach with staying power.

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The following is our latest Fund Analyst Report for Columbia Dividend Income (LBSAX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

Columbia Dividend Income's proven team and first-rate approach earn a Morningstar Analyst Rating of Silver across all share classes except the pricier C shares, which receive a Bronze rating.

This team has earned its stripes. Lead manager Scott Davis brings stable leadership to this strategy. He joined predecessor firm FleetBoston in 1985 and has served as a manager on the strategy since November 2001. Michael Barclay joined Columbia Threadneedle in 2006 as an equity analyst and began comanaging the fund in 2011. The two are dedicated to this strategy. Peter Santoro, who also comanages Bronze-rated Columbia Select Large Cap Equity (CLEYX), came aboard in 2014 to round out the team. The managers work closely with Columbia's central equity team of more than 20 analysts. Manager ownership is a weak spot here, though. Despite nearly two decades on the strategy, Davis only invests between $100,000 and $500,000 in the fund.

The team's patient and well-defined approach has proved its staying power. The managers look for Russell 1000 Index constituents with sustainable cash flows that lead to steady, and sometimes increasing, dividend payments to make up the approximately 80-stock portfolio. The managers' preference for sturdier fare has tended to result in a higher-quality portfolio than the typical large-value Morningstar Category peer. Davis has a long investment horizon; the strategy's portfolio turnover averaged just 19% over the past five years, well below the 60% large-value category average over that span.

The resulting portfolio's risk/reward profile is compelling. From Davis' start through July 2020, the institutional shares' 8.5% annualized gain outpaced the Russell 1000 Value category index's 7.1% and typical peer's 6.0%. Strong downside protection and lower volatility relative to the benchmark led to even better risk-adjusted returns over his tenure. The fund's performance during 2020's market plunge was no exception: It captured just 68% of the benchmark's losses and 77% of its volatility for the year to date through July.

Process | High
This patient, consistent, and well-defined approach continues to prove its stamina. The fund's Process Pillar earns an upgrade to High from Above Average.

The managers look for firms with sustainable cash flows that lead to steady, and sometimes increasing, dividend payments. The team ranks companies in the Russell 1000 Index on their free cash flow/price ratios, typically choosing stocks from the highest two quintiles. The team says earnings are easily manipulated, so it doesn't find payout ratios particularly meaningful. The managers also think that companies with the highest yields typically cannot support those payments over time, so they focus on a company's ability to continue to generate cash. They evaluate firms' capital allocation decisions, including share repurchases, acquisitions, debt repayment, and how dividend policies affect cash flows. They project cash flow out 18 to 24 months to help determine valuations but will often hold their picks for longer. Portfolio turnover has averaged just 19% over the past five years, well below the 60% large-value category average during that span.

The managers don't want to sell problematic names too slowly, though. The team will consider a sale if a holding's free cash flow/price ratio drops to the fourth or fifth quintile, the balance sheet deteriorates, management stumbles, or capital deployment changes.

People | Above Average
An accomplished leader and seasoned comanagers earn this strategy an Above Average People rating.

Experienced and stable leadership is at the helm here. Scott Davis became lead manager in 2012, in preparation for the retirement of prior lead manager Dick Dahlberg at the end of 2013. The strategy hasn't missed a beat since. Davis had comanaged since 2001, two years before Dahlberg joined, and implemented its free cash-flow-focused dividend strategy. Davis has a long tenure with the fund's parent organization. He joined FleetBoston, a predecessor of Columbia, in 1985 as a portfolio manager. Comanager Michael Barclay has assisted Davis since March 2011. He had worked as an equity analyst for the firm since 2006 and has 29 years of investment experience. Peter Santoro joined the team in June 2014 and also comanages Bronze-rated Columbia Select Large Cap Equity. He has 24 years of industry experience.

The team has consistently executed this approach, delivering strong returns, downside protection, and limited volatility--no small feat for a lean team that relies heavily on Columbia's experienced central research team of over 20 U.S. equity analysts who adapt their models to this strategy.

Manager investment is a weak spot, especially given Davis' long tenure. Davis and Santoro invest just $100,000 to $500,000 each in the fund. Barclay invests between $500,000 and $1 million.

Parent | Average
Despite noteworthy progress, especially on the fixed-income side, a combination of pluses and minuses support an Average rating.

Columbia Threadneedle's fixed-income team has stabilized and fully integrated globally over the past several years, which has increased consistency of approach across strategies and delivered encouraging results. Improvements to fixed income complement strengths on the equity side from several of the firm's distinct franchises, including Dividend Income, Contrarian Core, and Columbia's Seligman technology offerings. Outside the United States, the firm's smaller (by assets under management) U.K. equities suite also continues to be solid.

While Columbia's successes stem in part from global CIO Colin Moore allowing portfolio managers significant independence, there have been some disappointments. The firm's Wanger unit, which runs Columbia's Acorn funds, has experienced team churn, middling performance, and outflows over the past decade, though there are some recent signs of stabilization. Product rationalization efforts are noteworthy, but redundant offerings remain. Moore has burnished the firm's central equity-research team, but positive impact on returns has yet to be demonstrated. And while the firm has some traditional target-risk strategies, Columbia's more-recent multi-asset efforts haven't borne much fruit, and its target-date series are quite small.

Price
It's critical to evaluate expenses, as they come directly out of returns. The A share class levies a fee that ranks in its Morningstar Category's middle quintile. That's not great, but based on our assessment of the fund's People, Process, and Parent Pillars in the context of these fees, we think this share class will still be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Silver.

Performance
The strategy has developed a competitive risk/reward profile over lead manager Davis' tenure. Since he joined the strategy in November 2001 through July 2020, the institutional share class' 8.5% annualized gain topped its typical large-value category peer's 6.0% and the Russell 1000 Value category benchmark's 7.1% but trailed the Russell 1000 Index's 8.6%. The fund's defensive investment style gave it protection in down markets and lower volatility relative to the Russell 1000 Value. The strategy captured just 80% of the benchmark's losses but secured 91% of its gains over Davis' tenure.

The fund has spent time in both the value and blend sections of the Morningstar Style Box, a product of its investable universe and investment criteria. Even so, the strategy holds up well against large-blend peers, too. It outpaced 85% of them over Davis' tenure and topped both the Russell 1000 and Russell 1000 Value Indexes on a risk-adjusted basis.

The strategy fared well in 2020's market drawdown. From the Russell 1000 Value's Feb. 13 peak to its March 16 trough, the strategy fell 27.1% versus that benchmark's 32.3% loss, outpacing 94% of large-value peers. Since the start of the year through July, the fund's volatility (as measured by standard deviation) was more than 20% less than the bogy's and peers', resulting in attractive risk-adjusted returns.

Portfolio 
The managers' preference for sturdier, cash-generating fare often results in a higher-quality portfolio. As of June 2020, the portfolio's average return on equity and return on invested capital were 52% and 43% higher than its typical large-value category peer, respectively. Dividend-paying firms with sustainable cash flow generation are often larger companies; the portfolio's average market cap as of June was 20% higher than its typical peer's $94 billion.

The managers' bets are modest. The team keeps individual position weightings within 3 percentage points of the Russell 1000 Index and sector weightings within 10. It typically favors industrials and financials but treads lightly in communication-services and consumer discretionary names relative to the bogy. As of June, the fund had a 6.2-percentage-point underweighting in communication services and a 4.9-percentage-point overweighting in financials. With its value tilt and its ties to the core Russell 1000 Index, the portfolio has spent time in both the large-value and large-blend portions of the style box.

The market volatility in 2020's first half presented opportunities for the team to trade. For example, they exited apparel firm TJX Companies (TJX) in April after the company suspended its dividend and purchased Internet retail firm eBay (EBAY) that same month.

Tony Thomas does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.