We seek an immediate cash return on client dollars invested. We believe that a healthy and consistent dividend policy enhances investor total return, endorses historic accounting statements, and acts as an effective governor on capital allocation. According to our analysis, dividend stocks have historically outperformed the market with lower volatility1. We focus on stocks with dividend yields at least 1.5x that of the S&P 500 index yield. Within this high income universe, we search for companies with manageable debt, ample free cash flow and attractive returns on equity. While our strong balance sheet and dividend discipline generates mostly large company holdings, we invest in all capitalizations. We are particularly interested in high dividend-yielding stocks with strong balance sheets that we believe are under-followed by other managers and Wall Street analysts.
Candidates for purchase should have a history of increasing dividends. We seek to identify company management teams with experience, significant equity ownership and a tangible commitment to paying consistent and growing dividends over time. We are dedicated to rigorous analysis of company filings and financial statements, focusing on a company’s true quality of earnings and capacity to cover an increasing dividend payment. Our goal is to understand the capital structure of the business and the consistency of cash generation. Through conversations with company management and their competitors, we seek to identify an investment thesis strong enough to attract investor capital over the next several years.
Extensive valuation work completes our investment process. We employ a proprietary Hamlin Dividend Discount Model, earnings power analysis and historical multiple analysis (absolute and relative to peers) to identify fair value. We purchase when the current price implies a perceived margin of safety and significant upside to our assessment of fair value.
1 Kenneth French, Roth Family Distinguished Professor of Finance at Tuck School of Business at Dartmouth; “Portfolios Formed on Dividend Yield”