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Q. Why are dividends such an important part of your investment strategy?
A. Many investors focus largely on share price movements and market momentum instead of dividends—not realizing the extent to which long-run returns are influenced by dividends that are reinvested. In fact, reinvested dividends historically have accounted for at least 40% of total return over any significant time period since 1900 [see Chart 1], according to a study of U.S. and U.K. equities conducted by three London Business School professor for Credit Suisse.1
Source: Elroy Dimson, Paul Marsh, and Mike Staunton, “The Triumph of the Optimists,” Credit Suisse, 2009.
Note: This chart shows the difference in terminal wealth arising from reinvested income can be very large. The light-blue line shows the total
return from a policy of investing $1 in U.S. equities at the start of 1900, and reinvesting all dividend income. By the start of 2009—109 years later—the initial investment would have grown by 582 times. According to Credit Suisse, the magenta line shows the real return obtained by a trust fund that paid out all of its income, rather than reinvesting dividends. This line shows that the $1 initial investment would have grown by just six times by the start of 2009, the equivalent of a real capital gain of 1.7% a year. The remaining two lines show the equivalent figures for the United Kingdom. Thus, the longer the investment horizon, the more important is dividend income, the authors said.
Dividends are not guaranteed and may be initiated, suspended, raised, or lowered at the discretion of the issuing company.
Past performance is no guarantee of future results.
This chart is for illustrative purposes only and does not represent the performance of any Lord Abbett fund, product, or any specific investment.
Indexes are unmanaged, do not reflect the deduction of fees or expenses and are not available for direct investment.
Q. How would you characterize the opportunities for dividend investors overseas?
A. Dividend yields are more plentiful and significantly higher in many overseas markets, such as Europe, the United Kingdom, Australia, Hong Kong, and select emerging markets, than they are in the United States [see Chart 2]—and selecting markets by the highest yields has, historically, led to significant long-term returns [see Chart 3].
Source: Bloomberg; data as of May 3, 2012.
This chart reflects the long-term annual returns of 19 major equity markets, rebalanced annually, arranged into five quintiles based on the historical dividend yields of companies within each respective market. The categories depicted represent the lowest-yielding quintile of countries to the highest-yielding quintile. For the 111-year period (1900-2010), a $1 investment in the lowest-yielding quintile of countries would have grown to $370 by the end of 2010. The same initial investment allocated to the highest-yielding quintile of countries would have grown to a value of more than $1,000,000 by year-end 2010.
Source: Elroy Dimson, Paul Marsh, and Mike Staunton; data are most recent available.
Dividends are not guaranteed and may be initiated, suspended, raised or lowered at the discretion of the issuing company.
Past performance is no guarantee of future results.
The data represented in this chart is for illustrative purposes only and is not intended to predict or depict the performance of any Lord Abbet fund or product or any specific investment.
Q. Please describe your investment objective and portfolio selection process.
A.The International Dividend Strategy seeks to outperform its benchmark, the MSCI All Country Ex-U.S. Value Index,2 over a full market cycle. Our portfolio selection process begins with a potential universe of approximately 4,500 companies, all non-U.S. firms, and each with a market cap greater than US$1.5 billion. Using a bottom-up, value equity approach, the team then screens for high-dividend-yield companies with an emphasis on stable dividends, low valuations, and good business fundamentals. The effective universe of high-yielding companies is approximately 450, at any single point in time, with 80–90 companies making it into the portfolio.
Q. Where do you find the best opportunities?
A.We historically have found our best ideas in this strategy across three “extreme” corners of our potential investment universe. The first area are those stocks with a current dividend yield greater than the current P/E [price-to-earnings] multiple. This universe is not large, and is not without risk. As of May 25, 2012, we held 15 companies in the portfolio with these characteristics.
The second area of interest comprises companies where current dividend yields are higher than the yields on the corporate debt on their balance sheets. These tend to be solid companies with generous dividend policies. As of May 25, 2012, we held 23 companies in the portfolio with these characteristics.
Finally, the third area consists of companies, usually in emerging markets, that are controlled by a multinational parent company, but are still listed on a stock exchange in the emerging market. The multinational parent company, not surprisingly, forces its listed subsidiary to pay out most or all of its earnings in the form of dividends. As minority shareholders, we have access to the same dividend flows as the parent company (assuming we are invested in the same share class). These dividend yields have historically been in the 8–10% range. As of May 25, 2012, we held six companies in the portfolio in this category.
Q. What misperceptions about the investment strategy did you have to overcome?
A. The most common misperception is the idea that we are just "clipping dividends" from higher-dividend-yielding stocks. This is not our investment strategy; our strategy is to invest in undervalued stocks that also carry relatively high dividend yields. We believe that this strategy can cause investors to benefit in two ways: the compounding of reinvested dividends and the appreciation of the undervalued stock.
Q. How do emerging markets factor in this strategy?
A. Emerging markets have been a substantial contributor to our returns over the past three years. Many investors are surprised by the number of high-dividend-yielding companies that exist in the emerging market universe. As of May 25, 2012, we held approximately 18% of the portfolio in emerging markets, across many markets, including Turkey, Hong Kong/China, Brazil, Poland, and Thailand.
Q. What sets the international dividend strategy apart from other offerings in this area?
A.The first major difference is philosophical. We understand from the Credit Suisse study that reinvested dividends historically have accounted for 40–60% of the total return of any major global equity market over any 10-year time period since 1900. Armed with this information, we believe that our high dividend yield/low valuation strategy sets us up to deliver competitive total returns.
Our international dividend yield/low valuation approach is different from many international value investment strategies because they tend to focus on distressed/low valuation companies that are no longer able to pay a dividend.
Q. How do you address the risk of dividend cuts?
A. Dividend cuts tend to be cyclical and generally ebb and flow with the global economy. We did see a number of dividend cuts and eliminations in 2009, but have not experienced many during the last two years as the global economy has recovered. We believe the combination of rigorous bottom-up analysis and meetings with company management can yield well-informed opinions about the sustainability of dividends. In other words, active managers should be better able than passive managers to detect companies at risk of cutting their dividends.
Q. Please describe the discipline that goes into risk management.
A.We believe our process of looking at risk at three different levels, including hurdle rates at the stock level, differentiates us from other managers. At the stock level, the team developed a system in 1997 that integrates the consideration of risk into every investment we analyze. When it comes to stock selection, we do not simply look at the expected return of an investment. We want to know that we are getting compensated for the risk we take, and we believe our process accomplishes this objective. [There can be no assurance that this objective will be met.]
We assign a risk ranking to each company we analyze based on four sets of factors: the size and liquidity of the company; the cyclicality of the business;the macroeconomic environment; and the business plan and management track record. A low-risk, blue-chip stock in a mature industry with a stable macro-environment would be ranked Tier One, leading us to require a return of at least 15% over an 18-month time period [see Chart 4]. As we move out on the curve on the four factors, we will demand higher anticipated rates of returns. By the time we get to the highest-risk companies, those in Tier Four, we demand an anticipated rate of return of 30%, which is twice the upside of a Tier One company.
Source: Lord Abbett.
—Reported by Steve Govoni