CHICAGO -- There's good news for dividend-seekers in the current low-yield environment: An increasing number of companies are considering funneling dividends to shareholders.

But there's also not-so-good news, according to fund managers at Morningstar’s annual Investment Conference last week: It’s still difficult to find good companies that will both appreciate in value and offer dividends that will grow on a sustainable basis.

“There’s no doubt that this world has opened up and more companies are now open to dividends,” said Thomas Huber, manager of the T. Rowe Price Dividend Growth Fund, speaking at the conference’s “Dividends and Prudence” session.

“More companies are seeing the virtue of paying dividends,” agreed Don Kilbride, equity portfolio manager for Wellington Management. “The opportunity set is greater.”

LOWER PAYOUTS

Yet despite the higher number of companies distributing dividends, many of them are paying out lower dividends, said Josh Peters, director of equity income strategy for Morningstar: “Finding the sweet spot of dividend growth and share price appreciation is not easy."

With more dividend-paying companies to choose from, finding good companies at value prices has become more challenging, the panelists said.

“Higher-yield companies get bid up,” Huber said, “but there are still some reasonable values out there.”

Added Peters, “The cheaper the stock, the higher the correlation to volatility and risk. ... In this environment I will pay a fair price for a good business.”

INTEREST RATE IMPACT?

The panelists also expressed varying degrees of concern about the impact of rising interest rates on dividends.

“The dividend world is subject to the whim of interest rates,” said Huber, who has managed the Dividend Growth fund since 2000. “Rising interest rates are not a good thing" for dividend-paying stocks, he added.

But Kilbride, who manages the Vanguard Dividend Growth Fund, argued that rising interest rates are a sign of a healthier economy -- and that, as a result, “dividend growth will do better in a normal environment.”

Investors have “no alternative” to interest rate risk for dividend-paying stocks, Peters said. Bonds also had inherent interest rate risk and cash ultimately loses value, he noted.

Since total return is his ultimate goal, “interest rate risk is a trade-off I’m happy to accept.”
Indeed, sustained dividend growth and free cash flow that can support it were highly prized by all the panelists.

As Kilbride put it, “dividend growth is the key that unlocks the puzzle.”

Read more: