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Sunday, August 12, 2012 - Page updated at 07:30 p.m.
Fund manager's advice: Wise investors should go slowly
By MARK JEWELL
The Associated Press
BOSTON — In an era when high-frequency traders exploit split-second stock price movements, Don Taylor sounds like a throwback to a different time.
The manager of the highly rated Franklin Rising Dividends mutual fund talks about stock-picking almost like someone evaluating a potential spouse.
"We're trying to find good companies, and sticking with them," Taylor says, "unless they get too expensive."
Taylor's fund (FRDPX) exemplifies the patient approach to investing that most believe wins out over frequent trading.
In a recent interview, Taylor discussed how he selects stocks, and offered insights about dividend investing. Here are excerpts:
Q: How does your fund narrow its list of potential stocks to buy?
A: We run stocks through five screens. For starters, they must have increased their dividend payments in eight of the past 10 years, and not made any dividend cuts during that time. And overall, they must have doubled their dividend over those 10 years. On average, the companies in the fund's current portfolio have increased their dividends 29 years in a row. The vast majority of them kept on increasing dividends through the financial crisis.
Q: Becton Dickinson has been a strong performer for your fund the past 16 years. But you must have had doubts about the stock at some point. What's kept you in?
A: I don't recall the market ever getting particularly excited about the stock. But this company just grinds away, and it works. It doesn't have to be spectacular.
Q: It's relatively easy to select stocks with high dividend yields (the amount of the annual dividend, divided by the share price). But it's another matter to find stocks that are likely to continue increasing their dividends. How do you go about that?
A: Think about what the yield on the stock is going to be five, 10 or 15 years from now, based on today's price. I spend lots of time focusing on the characteristics of a business, and whether it can consistently and predictably grow, and therefore enable the dividend to grow. If it can, it will work.
The stock may languish in any given year. But I'm not focused on beating a benchmark on a quarterly basis, as long as the underlying growth prospects are there. I want the dividend growth to come from a company's business growing, not simply from a payout ratio increase.
Q: Technology companies have become the second most-generous dividend-paying industry group in the S&P 500, and now even Apple is going to pay a dividend. Do you see lots of opportunity in tech stocks?
A: We're starting to get a few companies with rising dividend records, and IBM is one of our biggest holdings. (It was second-largest at the end of June, behind Chevron). Still, most of the tech companies that meet our requirement for consistent dividend increases are in industries that are too cyclical, or they have some other issues that I'm not particularly comfortable with. So we don't own a lot of tech stocks.
Q: For income-oriented investors, what's a better option now: dividend stocks or bonds?
A: With bond yields so low, investors are looking to the stock market to provide yield. If a company has a very safe dividend — which is what you want if you're looking for income from stocks rather than from the bond market — there is a good chance that dividend will grow.
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