Yield Search Boosts Dividend Appeal07.31.2014
Investment managers have diminished expectations about opportunities for capturing alpha in the post-financial crisis era, and that has given impetus to investing in dividend-paying stocks.
“We are in an era of constrained capitalism for the U.S. economy and many developed country economies,” said Mark Eveans, president and chief investment officer at Meritage Portfolio Management, a Kansas City-based firm that manages $1.5 billion. “Central bank policies combined with fiscal policies of most governments are in effect crowding out free-market capitalism.”
In May, Meritage launched a yield-focused equity mutual fund which has $20 million in assets under management, but the firm has been employing a yield-focused strategy in its separately-managed accounts since the early 2000s.
“We found a very under-appreciated dividend approach,” Eveans said. “Dividends historically have been a high percentage of total return over long periods of time. We said let’s focus on a strategy that delivers a full equity return, just as good as our value and our growth strategies, but that gets two-thirds of it from income. “
When it launched the yield-focused strategy in 2003, Meritage assumed that 9% was an achievable target for general equity market returns, considering inflation and interest rates. Today it looks more like 5% or 6% equity returns are possible, if not probable, and that safe fixed income structures are simply not going to give you much of that, according to Eveans.
The yield-focused strategy today yields 5.2% compared to the 10-Year Treasury at 2.5Yield Search %, said Eveans. “We would agree interest rates should at some point rally, but also think they will still stay erratic and well under the 4-5% yield-curve of years past.”
In addition to yield, Meritage pursues value and growth strategies. “Companies can be fast growing, slow growing, but as long as we can find comfort in the cash flow valuation characteristics and our ability to have a good sense of where they’re headed, we can do well in that area,” said Eveans.
As for growth, “when you look at our portfolio, you see growth stocks, but you’d also see a heavy overlay of valuation on top of that,” Eveans said. “What we’re running there is a valuation-driven growth approach which has very attractive characteristics in terms of volatility and performance.”
Since the yield-focused strategy derives the bulk of its return from income, stock price doesn’t carry as much weight.
“We are a long only player,” Eveans said. “We don’t use leverage to apply to any of our strategies and that way we’re dramatically different from a hedge fund. We are traditional in the sense of being long-term oriented, and investment time-frame oriented. Hedge funds oftentimes, at least in our view, are much more short-term oriented in the tactics and the strategies that they employ. “
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