Stability Analysis
Unlike bond interest, dividend payments are not sacrosanct. Management can reduce or eliminate their dividend payment at any time and the business will go on. Therefore, stability analysis is vital to dividend investing. There are many factors that feed into this process, such as balance sheet strength, external and internal business threats, economic sensitivity, cash flow consistency, competitive advantages, and more. This stability framework is a rare trait in the dividend investing world.
Metrics
Once we feel comfortable that the dividend stream is unlikely to disappear, the next step is to assure that it will likely grow over time. Since dividends must be paid with cash, we must be confident their cash flow generation will grow. This takes consistent investment in their business driven by highly consistent profitability which ultimately drives strong shareholder returns. By using metrics like Return on Assets, Return on Equity, Return on Invested Capital, and more, we find superior businesses that deliver results for our client's portfolios. This growth of income is vital to long-term returns which is what most professional and novice investors ignore.
Layers
A fixed income layer to the portfolio helps create an overall investment portfolio that generates more stable performance over time and smooths out volatility from the stock market. Often times stocks and bonds move in different directions. The fixed income produced from the bonds can help compensate for stock losses in times of market turmoil. We also have a 40-60% allocation band between the two asset classes which allows us to overweight in the most attractive asset class, while our competitors usually have static allocation targets that do not adjust based on current valuations.