Dividend Growth: A Hallmark of Quality More than Ever

Some market observers have speculated many companies could cut dividends as the COVID-19 pandemic continues to unfold. However, that doesn’t mean there aren’t still opportunities for yield-seeking investors, says Franklin Equity Group’s Nick Getaz and Matt Quinlan. They explain why they look for select high-quality stocks with a strong track record of dividend growth through a range of positive and negative economic conditions.

Amid COVID-19-related economic turmoil, many equity investors have asked for our view on the prospects for widespread dividend cuts in the US stock market. It’s an understandable concern as recent media reports suggest upwards of 25% of dividend-paying companies in the S&P 500 Index could reduce their dividends, and we’ve already seen some high-profile names do so.1

Broadly speaking, we think this trend of dividend cuts will likely continue for at least the near term, given the sharp decline in economic activity since the spread of the coronavirus. Many companies are likely to be more conservative with their cash until there’s more clarity on when the pandemic is over from an economic standpoint.2

From a portfolio standpoint, it is hard to be completely immune from dividend cuts in this environment. However, we have thus far seen a limited number of dividend cuts, while at the same time we have seen several companies increase their dividends.

Although we expect the overall dividend growth rate for our portfolio holdings to be lower than in recent years, we think the rate could still be considerably better than the overall market currently seems to be expecting. We’ve been monitoring commentary from many corporate management teams very closely during the first-quarter earnings season, and many companies we follow have announced they have every intention to maintain or grow their dividend.