By Philip van Doorn, MarketWatch
Prices have declined significantly in 2020, but Dave King of Columbia Threadneedle Investments believes dividend cuts for the big players are unlikely
The stock market's remarkable rally from its March 23 low may be foremost on many investors' minds, but for income-seekers, these are difficult times because interest rates are so low. Dave King, the head of growth and income strategies at Columbia Threadneedle Investments, pointed to financial stocks as an area investors should consider, because stock prices are still down significantly this year and banks are in much better shape than they were in the last time the U.S. economy entered a recession.
King co-manages several funds, including the $2.2 billion Columbia Dividend Opportunity Fund . The fund's objective is to provide a high level of income with a portfolio of stocks, while also seeking capital growth. The fund's institutional shares have a dividend yield of 3.71% and are rated four stars (out of five) by financial research firm Morningstar.
King said the fund seeks to provide a dividend yield "in the top quartile" of the Lipper Equity Income peer group.
During an interview, King described the fund's portfolio: "We hold pretty staid stocks that would be appropriate for your oldest living relative."
He pointed to banks as a group where he and his colleagues have been making adjustments to improve the quality of the portfolio. Bank stocks as a group "have come down so much, and there are many where the dividend is 100% certain, other than by Federal Reserve action."
King couldn't comment about recent trades, but here are the fund's 10 holdings in the financial services sector as of April 30:
Company Ticker Dividend yield Total return - 2020 through May 15 Fund holding rank as of April 30 % of portfolio as of April 30
JPMorgan Chase & Co. US:JPM 4.19% -37% 2 4.5%
Citigroup Inc. US:C 4.87% -47% 12 2.1%
Wells Fargo & Co. US:WFC 8.73% -55% 18 1.7%
Morgan Stanley US:MS 3.75% -26% 35 1.0%
MetLife Inc. US:MET 5.80% -36% 42 0.9%
Principal Financial Group Inc. US:PFG 6.62% -38% 43 0.9%
U.S. Bancorp US:USB 5.48% -48% 45 0.8%
Truist Financial Corp. US:TFC 5.74% -43% 54 0.6%
KeyCorp US:KEY 7.61% -51% 57 0.6%
Ares Capital Corp. US:ARCC 11.96% -26% 66 0.4%
You can click on the tickers for more about each company.
You will have to scroll the table to see all of the data.
King is confident in the ability of JPMorgan Chase (JPM), the fund's second-largest holding, to maintain its dividend. He said his confidence springs from the annual review of large U.S. banks' capital deployment plans as part of the Federal Reserve's stress testing.
In contrast to the 2008 financial crisis, when it became obvious that many large banks needed additional capital, the banks went into the coronavirus crisis "with roughly two times the capital they did last time," he said.
So he doesn't expect much dividend-cutting among the large U.S. banks.
The company with the highest yield on the list is Ares Capital Corp. (ARCC), which is a business development company. BDCs make loans to medium-sized businesses that can be riskier (with much higher interest rates) than the commercial loans being made by banks, as they often take junior lien positions. Dividend yields tend to be high because of the BDCs' use of leverage.
King said that Ares "combines scale with a strong credit culture," and that "it has held up better than many banks in this downturn."
"I believe the big reason for ARCC's selloff is that most of their loans are floating rate, so the big decline in short rates when the Fed cut sharply has pressured the ARCC net interest margin," he added.
That said, Wells Fargo & Co. (WFC) (also held by the fund) was the largest bank included last week on this list ( ) of 21"potential dividend-cut candidates" from Keefe, Bruyette & Woods. Wells Fargo has been operating under a Federal Reserve restriction against growing its total assets after customer service scandals. It also has a dividend yield or 8.73%, more than twice as high as JPMorgan Chase's yield.
A yield can indicate a lack of confidence among investors that a company will be able to maintain its dividend. But even though Wells Fargo was on the KBW list, KBW analyst Brian Kleinhanzl wrote in a separate report on May 13: "Ultimately, we believe that WFC has excess capital so the company can continue to pay dividends despite the prospect of not earning the dividend through net income."
King agrees that "Wells can be a special case" because of its higher level of scrutiny by the Federal Reserve, but for the large banks in general, he sees an opportunity at these discounted prices because the group has been "doing what they are supposed to be doing" by having their capital plans approved by the regulator.
Companies that have recently raised dividends
Looking further into the financial sector, King mentioned MetLife Inc. (MET) as an attractive play after a significant pullback this year, with a yield of 5.80%. The stock "never gets a high multiple [to earnings] because it is not a growth business," he said. The company raised its quarterly dividend to 46 cents a share from 44 cents on April 28.
Other holdings of the fund that have recently raised dividends include Johnson & Johnson (JNJ), which increased its quarterly dividend to $1.01 a share from 95 cents on April 14, and Procter & Gamble Co. (PG), which raised its quarterly payout to $0.7907 a share from $0.7459.
King said, "it's a very interesting signal" for a company's management and board of directors to be confident enough, even heading into what may be a severe recession, to increase dividends.
King said he was able to sell the fund's shares of Delta Air Lines Inc. (DAL) before the company suspended its dividend on March 20. The fund also sold its holdings of Suncor Energy Inc. (SU.T), several months before the company cut its quarterly dividend by 55% a share on May 5.
But four holdings of the fund have cut dividends so far during the coronavirus crisis.
-- General Motors Co. (GM) suspended its dividend on April 27.
-- Las Vegas Sands Corp. (LVS) suspended its dividend on April 17.
-- Western Digital Corp. (WDC) suspended its dividend on April 30.
-- Extended Stay America Inc. (STAY) lowered its dividend to a penny a share from 23 cents on May 6. King said it "made sense" when the company articulated clearly that the dividend cut was temporary. During the first-quarter earnings call with analysts on May 7, Extended Stay America CFO Brian Nicholson referred to "the extremely tough decision to temporarily reduce our dividend in order to preserve liquidity and to preserve optionality at such time as the operating environment improves," and said once business trends are "more normalized," the dividend would be reviewed.
"This is going to be very important for income-oriented investors -- owning a company where if you do cut, you have an understanding of when it will be restored," King said.
The fund's largest holdings
Here are the Columbia Dividend Opportunity Fund's 10 largest holdings as of April 30:
-Philip van Doorn; 415-439-6400; AskNewswires@dowjones.com
Company Ticker Dividend yield Total return - 2020 through May 15 % of portfolio as of April 30
Johnson & Johnson US:JNJ 2.69% 4% 5.0%
JPMorgan Chase & Co. US:JPM 4.19% -37% 4.5%
Verizon Communications Inc. US:VZ 4.50% -9% 4.0%
Chevron Corp. US:CVX 5.79% -25% 3.6%
Cisco Systems Inc. US:CSCO 3.25% -6% 2.9%
AbbVie Inc. US:ABBV 5.20% 5% 2.7%
PepsiCo Inc. US:PEP 3.01% 0% 2.7%
AT&T Inc. US:T 7.35% -25% 2.7%
Broadcom Inc. US:AVGO 4.99% -16% 2.5%
International Business Machines Corp. US:IBM 5.57% -11% 2.3%
(END) Dow Jones Newswires
May 20, 2020 09:03 ET (13:03 GMT)
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