Colin: For the past several years, 80-90% of our holdings have paid dividends. 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.