By Philip van Doorn, MarketWatch
(This is the third in a series about dividend stocks in today’s low interest-rate environment based on interviews with professional investors. Links to the other articles are below.)
Ben Lofthouse, the head of global equity income at Janus Henderson Investors, understands how difficult life can be in this years-long low-interest-rate environment. But he advises income-seeking investors to think carefully about companies that might look like solid dividend payers but whose industries are changing so dramatically that the stocks (and their dividends) may be headed over a cliff.
“The danger for income investors is picking up a disproportion of disrupted businesses,” he said during an interview, citing high-yielding stocks of retailers as an example. “It is important to consider how you generate the yield, rather than how high the yield is.”
He believes managing this type of risk is more important than worrying about headline-driving events, such as the ongoing trade conflict between the U.S. and China.
‘There are new businesses evolving very quickly, and old, very profitable businesses that are being disrupted.’
Ben Lofthouse, head of global equity income at Janus Henderson Investors
Lofthouse co-manages the $4.4 billion Janus Henderson Global Equity Income Fund /zigman2/quotes/209472084/realtime HFQIX +0.30% and the $169 million Janus Henderson Dividend & Income Builder Fund /zigman2/quotes/202957012/realtime HDIVX +0.28% .
The August edition of the Janus Henderson Global Dividend Index study makes for fascinating reading and can be downloaded here in full . You might not expect such a high-level review of corporate dividend payment trends to apply to you, but it is informative, not only about opportunities in dividend stocks in a world that is starving for yield, but for investors who want to avoid getting burned.
Lofthouse pointed to dividend cuts this year by Daimler AG /zigman2/quotes/205332368/delayed DE:DAI +1.58% and BMW AG /zigman2/quotes/209548467/delayed DE:BMW +1.25% as examples of what can happen to venerable companies when an industry is being transformed.
“Where the biggest danger and threat lies at the moment is disruption,” he said, adding: “There are new businesses evolving very quickly, and old, very profitable businesses that are being disrupted.”
It is important for two of those words, “very profitable,” to sink in. Preconceived notions aren’t the friend of a long-term investor.
Think ahead. Do you believe a company you are considering for investment is likely to remain competitive in providing goods and services for the next decade or two? The auto industry is certainly in a transitional phase — probably a very long one.
You might also be careful with companies in cyclical industries, but Lofthouse made another interesting point: “Some of the biggest cuts we highlight in the index come from companies such as Anheuser-Busch InBev /zigman2/quotes/209225053/composite BUD +2.88% and Kraft Heinz /zigman2/quotes/203625533/composite KHC +1.40% , which are not cyclical.”
Janus Henderson Investors
Lofthouse said: “What may be a bigger threat to dividends are debt levels.” Anheuser-Busch InBev cut its dividend in October, while Kraft Heinz did so in February. Both companies cited “deleveraging” plans when announcing the reduced payouts.
Consider merger-deal announcements you have read: Some of those have included massive issuance of debt, which the combined company is saddled with. Nothing new has been created, but the combined company is, arguably, less healthy than the cobbled-together parts. Unless you have a fervent belief in the breathless, flowery language about “transformation” and “innovation” boards of directors will use when describing such deals, maybe the best thing to do is sell your shares of the acquirer or the target as soon as a large leveraged merger is announced.