Daniel Genter, CEO and CIO of RNC Genter Capital Management, has many funds under his watch but none are as popular as his high dividend income fund.
He believes investors typically approach dividend investments with one of two mandates: One, they just want to make sure the company is paying dividends, and two, they just want the highest dividend return possible. “We want to combine the two.”
To find the dividend paying stocks worthy of his portfolio, Genter explains in a phone interview with Kapitall all the criteria they must meet:
- 2.5% minimum yield
- Dividend increasing 6-8% per year
- No cuts in the last 5 years
- No payout ratios above 60%
- High income
If the dividend integrity is there, Genter next looks at a company like a bond investor. This means the balance sheet is reviewed and the firm decides if it would feel comfortable buying into regular bonds for the company. “We’re in a subordinate level, if they’re getting squeezed in debt, then it will have negative impact on dividend.”
Lastly, the fund acts as if it paid no dividend and conducts a pure evaluation on stock alone in regards to valuation and total return potential. This brings the eligible universe to a limited list, which gets boiled down to 30 names in the focus portfolio.
“There’s been some banter about is this [high dividend] space being too crowded, but we don’t see it. Just look at the valuations; right now on valuation the stocks are 22 full P/E multiple points below the S&P, so clearly we’re able to find undervalued stocks out there paying strong dividends.”
If you think “that company has a high yield, so I’m going to buy it,” then you’re walking through a minefield. Instead, if a company has a yield north of 5%, you should be thinking ‘what’s wrong?’
Genter says it doesn’t mean that’s the case, but you should be thinking about it. “There are many strong companies that are going to be in that area, but once you start to get to 5-7%, quite often there is a potential problem, but also where you find value.”
7% is a reasonably cap because once you’ve hit this level there’s a fundamental valuation problem. “They’re not going to keep yield at that level, and if they cut it the stock’s going to go down even more.” For example, Telefonica S.A. (TEF) of Spain has a notable 15.83% yield, but has already cut its dividend twice.
TOTAL S.A. (TOT) is a France-based integrated international oil and gas company. Despite the fact that it’s European, oil prices are down, and they’re recovering from a leak in the North Sea, Genter believes it is “a tremendous buy.”
He predicts top line production will grow 3% per year, while maintaining a 7% sustainable dividend. It has a P/E of 6.7. “You’re getting paid to be patient. It’s radically undervalued. Unless you think oil is going to $55, it’s going to grow.”
He sees a big future for MetLife in particular. He claims it is very committed to their dividend, and the only reason it’s not higher now is because they need federal approval to raise it. However they have petitioned to sell off their online banking division, and once they’re done with that the Fed will lose control. Genter says he can easily see a 30-50% increase in MET’s dividend yield. “They’re a real value at a 5.5 P/E. And they just bought AIG’s far eastern operation, which is nice for earnings.”
Business Section: Investing Ideas
“High dividends are our most popular and fastest growing fund. Performance is good and demand for the strategy in the market place is very high.”
Do you agree with this strategy? Are you interested in emulating it? Below are some RNC Genter Dividend Income Fund (GDIIX) top holdings from a variety of sectors.
Do you agree that these companies hold sustainable dividends and high growth potential?
Companies grouped by sector.
Use the Compar-O-Matic to see changes in dividend yield for the first 9 companies mentioned below:
2. Chevron Corporation (CVX, Earnings, Analysts, Financials): Engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. Market cap of $208.12B. Current yield at 3.41%.
4. Altria Group Inc. (MO, Earnings, Analysts, Financials): Engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. Market cap of $70.30B. Current yield at 4.75%. Current yield at 4.75%.
5. Philip Morris International, Inc. (PM, Earnings, Analysts, Financials): Engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. Market cap of $148.83B. Current yield at 3.53%.
10. Wells Fargo & Company (WFC, Earnings, Analysts, Financials): Provides retail, commercial, and corporate banking services primarily in the United States. Market cap of $177.70B. Current yield at 2.63%.
11. Johnson & Johnson (JNJ, Earnings, Analysts, Financials): Engages in the research and development, manufacture, and sale of various products in the health care field worldwide. Market cap of $185.54B. Current yield at 3.61%.
12. Merck & Co. Inc. (MRK, Earnings, Analysts, Financials): Provides various health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. Market cap of $126.99B. Current yield at 4.02%.
13. Novartis AG (NVS, Earnings, Analysts, Financials): Engages in the research, development, manufacture, and marketing of healthcare products worldwide. Market cap of $127.99B. Current yield at 4.44%.
16. Intel Corporation (INTC, Earnings, Analysts, Financials): Engages in the design, manufacture, and sale of integrated circuits for computing and communications industries worldwide. Market cap of $134.08B. Current yield at 3.15%.
18. AT&T, Inc. (T, Earnings, Analysts, Financials): Provides telecommunication services to consumers, businesses, and other service providers worldwide. Market cap of $209.07B. Current yield at 4.94%.
19. PPL Corporation (PPL, Earnings, Analysts, Financials): Generates and sells electricity; and delivers natural gas to approximately 5.3 million utility customers primarily in the northeastern and northwestern US. Market cap of $16.13B. Current yield at 5.18%.
Written by Rebecca Lipman. Author owns shares in PPL
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Dig Deeper: Access Company Snapshots, Charts, Filings
- ConocoPhillips (COP, Chart, Download SEC Filings)
- Chevron Corporation (CVX, Chart, Download SEC Filings)
- Total SA (TOT, Chart, Download SEC Filings)
- Altria Group Inc. (MO, Chart, Download SEC Filings)
- Philip Morris International, Inc. (PM, Chart, Download SEC Filings)
- Molson Coors Brewing Company (TAP, Chart, Download SEC Filings)
- JPMorgan Chase & Co. (JPM, Chart, Download SEC Filings)
- AFLAC Inc. (AFL, Chart, Download SEC Filings)
- BlackRock, Inc. (BLK, Chart, Download SEC Filings)
- Wells Fargo & Company (WFC, Chart, Download SEC Filings)
- Johnson & Johnson (JNJ, Chart, Download SEC Filings)
- Merck & Co. Inc. (MRK, Chart, Download SEC Filings)
- Novartis AG (NVS, Chart, Download SEC Filings)
- Pfizer Inc. (PFE, Chart, Download SEC Filings)
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