Going Active With Dividend Investing

July 28, 2022

The turbulence of the 2022 investing landscape has led many investors to revisit dividend-paying stocks as stability and income are favorable traits in a volatile market. A new blog post from Council steering committee member Invesco highlights how active management can play a key role in dividend strategy. Senior Portfolio Manager Peter Santoro and Senior Client Portfolio Manager Bryan Richardson write “we believe we are entering a period where dividends may play a key role in portfolios” and that active managers are “best-equipped” to maximize return potential.

Active Offsets Yield Chasing

Active management offers many benefits in dividend investing, including lessening the possibility of yield chasing, or selecting the stocks with the highest dividend yields and ignoring other factors. Santoro and Richardson write that yield chasing “can lead to inadvertent sector concentrations.” The domino effect from that is more volatility, extreme factor bets, and less diversification.

Instead, active managers can blunt those yield chasing effects by implementing key active strategies in portfolio management. According to Invesco, investors should focus on companies that exert the following traits:

• Growing free cash flow
• Strong balance sheets
• Capital discipline

These traits indicate that a company is in good financial health and is poised to pay and grow dividends for years to come. In addition, active managers can keep an eye on overall portfolio construction — as diversified dividend value investing “may result in better risk-adjusted returns potential and limit volatility during turbulent markets.”

Active Managers Are Best Equipped

When considering all these factors, the authors write that active managers are best equipped to view the total picture when it comes to dividends. That includes total return and risk, “including potential capital appreciation with lower potential volatility.”