Other portfolio managers are quick to remind investors, however, that just dividends, alone, are not enough to cut it. Chasing yield is not enough to cut it. A stock has to be able to maintain its earnings power.

Michael Cuggino, the president and portfolio manager at the Permanent Portfolio Family of Funds in San Francisco, says that in his firm’s growth equity funds, including the Aggressive Growth Portfolio, he is looking for companies with three- to five-year great growth stories that are leaders in their fields. Dividends are one aspect of that. He wants names that have pricing power and can control their cost structure. He shuns industries like the auto sector and utilities, for instance, that face regulation and legacy costs for their unwieldy infrastructure. Who cares if they pay good dividends?

“GM, for example, they are trading at a market P/E of 18 and paying a dividend of 3.5%. Definitely supportable by current earnings, but as you know, the auto industry earnings can be cyclical and change quickly. So while it’s supportable at the moment, it might not be supportable six months or a year from now.”

Among the companies Cuggino does like is Freeport McMoRan, a mining company in the beaten up area of hard assets. He says he likes it for its relatively low multiple of about 14 and dividend yield of 3.6%, which he says is better than a 30-year Treasury bond, and the payout is something less than 50% of earnings. “They have plenty of money for capex expansion.” He also likes financial services company State Street Bank, trading at multiples of 13 to 14 and a dividend yield of a little under 2%. It’s a financial company, but one that gets more money from fees and asset service than from loan products that depend on a company’s ability to milk high interest rates (which many banks, insurers and brokers can’t do right now, for obvious reasons).

Like Cuggino, Wong at Payden & Rygel is attracted to gaming company Wynn Resorts. CEO Steve Wynn “has a couple of casinos in the Strip, but more important, they have three casinos in the Macau province of China, which has become the gaming capital of the world,” says Wong. “It’s six or seven times the revenues of Las Vegas. We’re seeing a lot of gaming growth in that region. Wynn has three-quarters of revenue coming from Macau with the rest coming from Vegas. The beauty is that they’ve got attractive dividend yields of 2.5%. In addition, they have been paying out special dividends at the end of each year in addition to the regular dividend. When you factor that in, the dividend yield is 3.5%-4.5%, so with their success they’ve been able to pay out additional levels, which have been doubling. That’s not sustainable but …  it’s an indication of how much the regular dividend has been growing and that’s more a testament to [Wynn’s] success in running the company.”

Schoenstein, who co-manages the $5.4 billion Jensen Quality Growth Fund, says the fund focuses on companies that can deliver consistent growth, not just the highest-flying aggressive growers, which are more volatile. The fund doesn’t look at a company unless it has a consistent 15% return on equity every single year for 10 years. “That gives us a universe of just over 200 companies,” he says. And good dividend payers, rather than being a focus, are usually a pleasant side effect of that methodology. “Inside that subset, one of those things that’s very prevalent is a strong emphasis on dividends by the businesses because they produce a very high level of consistent free cash flow, and that’s the fuel that drives the engine.” Twenty-six of his companies pay about 2% dividend yields, not much different from the S&P 500, he says, but “the difference is that that dividends we have, the companies paying them are growing them at mid-to-high single digits or at double digit rates of growth.”

Household names like Pepsi stand out, he says: The company’s dividend is nearly 3%, supported by nice growth in its overall business “regardless of whether they have to fight soda taxes or obesity or whether they are fighting concerns about short-term emerging market growth trends.” Another company he likes is information technology company Automatic Data Processing. “It’s not a high-flying tech like a Google or a Facebook, but yet the business itself has proven to be resilient and fairly sustainable and allowed them also to pay a consistent dividend of almost 2.5% in terms of yield that is over and above what the business is doing.”

Financials are still totally downhill, says Silverblatt, pointing out the nightmare with Bank of America and other financial crisis disasters that impeded these companies’ abilities to pay dividends.

“Go back to 2007 and 2008, they almost accounted for a third of all dividends being paid,” he says. “But they went to a single digit. We now have 14%. We do not see them getting back to the 30% level, given that the Fed is watching them. Especially with Bank of America. That was a nightmare.” Bank of America had planned a dividend increase until May 2014, when it reported a $4 billion accounting error to the Fed and was forced to resubmit its plan.

Hogan says the larger financial companies are more at a disadvantage than they have been in the past, but the smaller banks don’t face the same degree of regulatory scrutiny and are able to take share from larger banks.

In any case, Fennell says that the steady search for yield is going to be unyielding—401(k) plans, 403(b) plans and the armies of aging baby boomers are going to be demanding it.

“It’s been interesting to see the outflows in the first quarter in this category,” he says. “It’s a pretty steady receiver of flows just due to its nature. I know a lot of defined contribution 401(k), 403(b)-type plans have some type of option like this in their lineup and it’s usually a pretty conservative way to go. The flows are usually on autopilot in a lot of these funds.”
 

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