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Vice President and Portfolio Manager
Colin: Dividends help force a level of discipline on the part of the management team. Generally speaking, management teams know that dividends are somewhat scarce, and they cannot be canceled in the future without significant repercussions. Dividends can also help keep management teams from incurring too much debt on the balance sheet. As the associated interest expense with that debt could put the dividend at risk during hard times.
All else equal, we prefer companies with attractive valuations on the basis of earnings, cash flows, and book value, along with modest dividend payout ratios in relation to a company's financial resources.
We are looking for companies with ample room to grow their dividends over time or conversely, we want company’s dividends to actually be safe if there was a downturn in the business cycle. We much prefer this narrative over one of high dividend yield, but also high dividend payout ratios and relations to a company's earnings and cash flows. Especially in the case of companies that already have a high bit of debt on the balance sheet. This tells us two things: 1) it suggests there's less room to raise dividends in the future, and 2) if there were a downturn in the business cycle, the dividend to be at risk.
Although we strongly prefer dividend payers, our investment process is driven by the 10 Principles of Value Investing™, and dividend yield is not one of our key valuation parameters. Dividend yield and the payment of the dividend is actually considered in our financial soundness section which is a holistic assessment of the company's debt levels compared to its financial resources.
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Past performance does not guarantee future results.
Investing involves risk, including the potential loss of principal.
There is no guarantee that a particular investment strategy will be successful.
Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.
The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.
Economic predictions are based on estimates and are subject to change.
Heartland Advisors’ 10 Principles of Value Investing™ consist of the following criteria for selecting securities: (1) catalyst for recognition; (2) low price in relation to earnings; (3) low price in relation to cash flow; (4) low price in relation to book value; (5) financial soundness; (6) positive earnings dynamics; (7) sound business strategy; (8) capable management and insider ownership; (9) value of company; and (10) positive technical analysis.
Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.
The future performance of any specific investment or strategy (including the investments discussed above) should not be assumed to be profitable or equal to past results. The performance of the holdings discussed above may have been the result of unique market circumstances that are no longer relevant. The holdings identified above do not represent all of the securities purchased, sold or recommended for the Advisor’s clients.
In certain cases, dividends and earnings are reinvested.
Heartland’s investing glossary provides definitions for several terms used on this page.
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