Capital Ideas^TM

With the fight against inflation still under way amid the banking turmoil, dividend-income investment opportunities could grow in importance and play a significant role in total return. In this interview, Aline Avzaradel, portfolio manager of the Capital Group Capital Income Builder strategy, explains her focus towards dividend sustainability, as well as the need to avoid dividend cutters, which can undermine a portfolio’s long-term return potential.

Experience has shown Aline that the holy grail to dividend investing is to seek attractive yield with strong and consistent dividend growth prospects. An important part of that is dividend sustainability – a company’s ability and willingness to pay dividends. It is sustainable growth, not high growth, that is key to long-term dividend investing.

The way she assesses dividend sustainability can be illustrated using the following diagram – the intersection of which shows the dividend payment history, which reflects both its ability to pay as well as management’s commitment to consistently pay and grow the dividend over time through various market cycles.

Refer to the investment insights paper “Dividend growers: The secret sauce of sustainable growth” for the comprehensive dividend ratings process developed by Capital Group’s Quantitative Research & Analytics group.

Meanwhile, anticipating and avoiding dividend cuts are not only a function of protecting the income generation of the portfolio, but also impact the overall portfolio return as, historically, stocks that cut dividends tend to fare worse than steady dividend payers and dividend growers

While management engagement is important, there is also a need to actively consider the scenarios in which a company might cut its dividend to calibrate the narrative we are hearing. Assessing the composition of the board of directors is also a key part of this process as ultimately it is the board that declares the dividend.