ClearBridge co-CIO Hersh Cohen sees a golden age for US dividends

Hersh Cohen, co-Chief Investment Officer at ClearBridge, the Legg Mason equity manger, says quality US companies are likely to keep rewarding investors with growing dividends.

This has been a wonderful year so far for dividend increases.

The number and extent of increases that have already occurred this year have exceeded even our most optimistic views, reinforcing our long-held belief that owning quality companies with the ability to deliver rising income will continue to pay off.

Several major names have announced dividend increases in the first part of 2013 including Apple, most recently, who’ve increased their quarterly dividend 15%, Comcast upped its distribution by 20%, Time Warner by 10.6% and Schlumberger by 13.6%. Other names increasing payouts include Kimberly-Clark, 3M, UPS, Nextera Energy, Texas Instruments, General Mills and Qualcomm, with the latter boosting its dividend by 40%.

Perhaps most notably, Wal-Mart Stores increased its payout by 18.2% and has grown it every year since it began paying a dividend in 1974.

ClearBridge is a long-term advocate of dividend stocks, fitting in with its philosophy of buying good companies at fair prices and holding them for long periods of time.

We focus on companies with superior business models, reflected in a high-quality balance sheet and dominance in their industry.

We prefer companies making products people want or need, and tend to be used up and replaced regularly – what used to be called the razor blade effect. Second, we want companies with strong free cashflow, which is deployed to generate sustainable growth and reward shareholders.

We believe the reasons for owning companies with the ability to pay rising dividends have been amply demonstrated so far in 2013.

Higher-yielding instruments invariably have significantly higher risk and when you buy stocks, you are not buying them just for the dividend. Growth is a key component as well and when investors over-emphasise current yield and buy the highest-income stocks, they are ignoring the fact the real power of dividends over time is their ability to rise as part of a company’s long-term growth.

What we are looking for is companies that optimise the combination of current income and growth. Whether in consumer staples, high-quality diversified industrial sectors or technology, we are likely to find very attractive investments that are not overvalued.

Fears about recent dividend tax changes are overstated.

Putting some historical perspective on this, marginal rates have varied widely over the years – ranging from 90% to 28%. But many companies have continued to increase their dividends throughout those periods. Some, like Procter and Gamble, have been raising their distribution for decades and the point is that companies pay dividends for reasons that go beyond current tax policies.


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