Our equity income model is constructed to meet the needs of clients seeking market-like returns with lower risk, as measured by the volatility of returns, with a higher portion of the total return coming via dividends. The dividend yield of this model is typically 50% higher than the S&P 500, and the companies within this model tend to increase their dividends at a 50% faster rate than average.
As we search for the right securities for equity income, earnings growth remains essential as most companies maintain a policy whereby their dividend rate is relatively consistent in proportion to their earnings. Diversification across economic sectors is also an important criteria.
Companies that meet our criteria for equity income typically share the following traits:
A leading position in mature but growing markets
These companies generally command leading market shares within their industry, based upon a long history of brand awareness, low cost structure or other competitive advantages.
Predictable earnings and dividend growth
We look for historic and prospective annual earnings growth of 5% or more, coupled with a policy of declaring dividends at a rate based upon earnings (payout ratio), not to exceed 60%.
Financial attributes include low debt ratios, high returns on equity and capital, and an ability to finance growth without frequently tapping capital markets.
Experienced leadership and a commitment to shareholder interests is vital.