A Focus on Attractive Dividend Growers
Nuveen Santa Barbara Dividend Growth Fund
Author: Ticker Magazine
Last Update: Aug 24, 11:19 AM ET
|Since companies committed to paying dividends operate under stricter financial discipline, as a group they tend to deliver stable performance. The Nuveen Santa Barbara Dividend Growth Fund focuses on investing in businesses with growing cash flow and rising dividends, which are likely to do better in challenging economic environments.
ďOur philosophy is that a company with the ability to sustain and grow its dividend is a reflection of a well-run business.Ē
The average individual position weight is 1Ė3% at cost, with a maximum weight of 5%. All sectors are represented, with industry exposure limited to 25% of the portfolio. As of 6/30/17, the fund is overweight in insurance and underweight in consumer finance.
Our preference is to own the best name in many different sectors. For example, we believe in IT hardware and software, we currently believe the best opportunities are in Apple Inc. and Microsoft Corporation. We used to own QUALCOMM, Inc., but sold it when we noticed weakening trends Ė several years ago, its customers were unhappy with royalty payments, and a backlash against the company had begun. Qualcomm still continues to have royalty issues and faces major challenges in the mobile space.
In telecom we own AT&T, which we believe has a better growth profile and prospects than its top competitor, Verizon Communications Inc.
AT&Tís excess free cash flow enables the company to fund its next leg of growth. Acquisitions such as DirecTV have helped reaccelerate growth despite having little leverage. The DirecTV acquisition also awakened investors to AT&Tís potential to combine telecom and mobile with subscription television.
AT&T did face many technical challenges when it transitioned from 2G to 3G. The next iterations, going from 3G to 4G, or 4G to 5G, may bring new challenges and the company must continue to deliver the network and services its customers expect. We are closely monitoring company management to see whether they are making the right decisions.
Q: Why does the portfolio only invest in 40 companies?
Our belief has always been that a high-conviction portfolio is more conducive to fundamental investing. Also, active share is important to us and we believe itís more manageable and credible with fewer names.
The portfolio has historically ranged between 30 and 40 names. Although 40 stocks allows for an opportunity to make huge home-run bets, we limit the position weight to 5% of the portfolio. In addition, when a company is in the crosshairs of a negative trend, we replace it or allocate the proceeds of its sale to existing holdings with higher conviction.
Q: Do you have any price targets?
We are constantly reviewing the Fundís holdings and setting a price target based on the latest available data. A companyís latest earnings report or a recent acquisition are catalysts for us to review the price target and perhaps raise or lower it.
However, the dividend is paramount to what drives our sell decisions. We seek to own companies with above-average market dividend growth, and we are always looking for evidence that a company might be unable to continue to raise its dividend.
We try to identify dividend cuts early. One thing to point out is that if a company cuts its dividend it does not immediately trigger a sell. The analyst will re-review the company and assess whether or not they believe the company could be a dividend grower sometime soon. If a drastic event happens to the company and takes management by surprise, often we will hold the stock until it recovers and exit the position later.
Finally, we will sell if a stock has fundamental deterioration. Because our analysts focus on specific industries, they know which companies are gaining market share and which are pricing irrationally. These are important indicators regarding the health of both a company and its industry.
Q: What does risk mean to you? How do you monitor and control risk?
The primary risk is loss of capital. Our philosophy of buying dividend-growth stocks provides a natural buffer to capital loss; having an income stream from a company thatís historically committed to paying a dividend helps mitigate risk. In addition, dividend growth companies have historically had lower standard deviation, a measure of risk, than non-dividend paying companies Ė an indication that our investable universe has a lower risk profile.
The companies we hold are established companies within their respective industries and tend to historically perform better during market downturns. They have high market share, defendable margins, and defensible business models.
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