Beyond Bulls & Bears

A Taylor-ed View of Dividends

Investors can be a fickle bunch. When the market environment appears unstable, or “risky,” they tend to sit on cash or move their assets into areas which they perceive as “safe,” such as government Treasuries or perhaps gold. In this sense, risk-taking is said to be “off” the table. When the market appears stable, the outlook more positive, and investors are embracing equities, risk is said to be “on.” Given the low-rate environment the markets are stuck in right now, many investors fleeing risk are also probably sacrificing yield at a time when they may need it most in order to meet their investment goals. In the wake of this dilemma, there’s been a lot of talk of dividends, so we turned to Franklin Rising Dividends Fund Manager Don Taylor for some perspective.

The “baby boomer” generation, people born in the U.S. from 1946 – 19601,  numbers some 78 million and is now moving into retirement. Taylor challenges this group in particular to think differently about their investments given the current economic climate.

Don Taylor

“We are currently in a low-growth, very low interest rate environment and I really don’t think that’s going to change too much anytime soon. Dividends and dividend yield in the equity market matter a lot more than they did before. We have been in an environment early this year where the average yield of the S&P 500 Index was actually slightly above the yield on 10-year Treasuries, and other than several months during the 2008-2009 financial crisis, we hadn’t been in this situation since the 1950’s.2 Importantly, at this point in time, the baby boomers are at the point where they should probably be thinking more and more about the income component of their portfolios. Just when they really need it in their portfolios, they’re having difficulty getting yield from traditional fixed-income investments. So we are starting to see how that is affecting the valuation of stocks, and I think that partly explains why there has been a lot more interest in dividend-paying stocks. The demographic need for yield and the ability of stocks to potentially provide that kind of yield is really a key change in the marketplace over the last couple of years.”

While risk was “on” in the first quarter of this year, Taylor said it’s important to remember that these trends tend to move in cycles. What’s on for investors yesterday may be off tomorrow. He believes what will win out in the long-run is quality—part of his core, long-term oriented strategy of focusing on not just dividends, but rising dividends.

“There are going to be periods where more cyclical factors are going to be dominating the marketplace, and that’s what we saw in the first quarter of 2012. If we are in a relatively slow-growth environment, there might be periods where it looks like the economy is strengthening, and maybe other periods when the economy is weakening. In that kind of environment, I believe high quality, predictability and consistency are important. So, we are really focusing on companies that pay some sort of dividend, but more importantly, have strong dividend growth prospects and a strong record of increasing their dividend.”

Cash on corporate balance sheets has been near an all-time high, leading many market watchers to speculate about which company might be next to increase or initiate a dividend. In March, the financial press followed with great interest Apple’s announcement of plans to initiate a quarterly dividend sometime between July 1 – September 30, 2012, as the technology giant hasn’t paid a dividend since 1995. Taylor said the development provides evidence that the marketplace is demanding dividends.

“There is this real need to get that (dividends) from the equity market, so Apple belatedly started to address that and change their capital allocation policies in order to try to tap into that investor need. In recent years, we have also seen other technology companies initiate a dividend; a year or two ago, Cisco started a dividend. And going back over the last 10-12 years, you have seen other major companies do that as well.” 3

While no one can predict where the market will head next, Sir John Templeton thought about the concept of risk-on/risk-off in a contrarian way:  “It is extremely difficult to go against the crowd—to buy when everyone is selling or has sold, to buy when things look darkest, to buy when so many experts are telling you stocks in general, or in this particular industry, or even in this type of company, are risky right now. But, if you buy the same securities everyone else is buying, you will have the same results as everyone else.”

Want more from Don Taylor? Check out “In Search of Dividends.”

Read Yield Scarcity: The Case for Dividends

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What Are the Risks?

All investments involve risks, including possible loss of principal.

Investing in dividend paying stocks involves risks. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Companies cannot assure or guarantee a certain rate of return or dividend yield; they can increase, decrease or totally eliminate their dividends without notice. A fund’s investment return and principal value will fluctuate with market conditions, and it is possible to lose money.

Value securities may not increase in price as anticipated or may decline further in value. While smaller and midsize companies may offer substantial opportunities for capital growth, they also involve heightened risks and should be considered speculative. Historically, smaller- and midsize- company securities have been more volatile in price than larger company securities, especially over the short term. These and other risks are detailed in the Franklin Rising Dividends Fund’s prospectus.


1Source: U.S. Census Bureau, Population estimates as of July 1, 2006.

2Sources: U.S. Federal Reserve and Robert J. Shiller, “Irrational Exuberance,” 2nd Edition, 2005, as updated by the author. Represents average yield of stocks comprising the S&P 500 Index. S&P 500 Index: STANDARD & POOR’S®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC. Standard & Poor’s does not sponsor, endorse, sell or promote any S&P index-based product. Treasury Yields: Federal Reserve H.15 Report. Indexes are unmanaged, and one cannot invest directly in an index. Past performance does not guarantee future results.

3As of 3/31/12, Franklin Rising Dividends Fund held no Apple or Cisco common stock. Holdings subject to change.

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