A Report from the Value Equities Investment Committee | PDF
Growing dividends are at the core of Confluence’s Increasing Dividend Equity Account (IDEA) strategy. Given the unprecedented nature of a national economic shutdown to combat COVID-19, it is likely that many companies, including some that may be held in the IDEA portfolio, will choose to not grow their dividends and some may even choose to temporarily suspend or decrease their dividends during the economic shutdown. With this possibility in mind we thought it would be helpful to proactively discuss the situation and our planned response prior to any changes companies might make with their dividends.
Why are growing dividends beneficial?
First, it would probably be helpful to review why owning companies with growing dividends is a good investment strategy. When you purchase a stock, you are buying a fractional portion of a company with the expectation of receiving a share of its ongoing cash flow. Each year a company’s earnings (cash flow) may be used to reinvest to grow the company, repurchase shares, pay dividends to the owners, or possibly do all three.
Over the long term, a stock’s total return will be determined by the cash flow growth and dividends paid out to the owners. As a result, a company with a history of consistent and growing dividends indicates a company with consistent and growing cash flow – a recipe for good long-term investment returns.
The team at Confluence has a long track record of identifying and investing in companies that not only have histories of growing dividends but also have solid prospects that those dividends should continue to grow well into the future.
Why would a company temporarily suspend or decrease its dividend in the current environment?