Don Taylor, portfolio manager for the Franklin Rising Dividends Fund, says some companies are raising dividends if you know where to look. Some of his favorite names include P&G, Praxair and Wal-Mart. In this video, Taylor speaks about his investment strategy.Companies represented in the benchmark S&P 500 index, which has fallen by half since its peak in October 2007, have withheld $40.8 billion in payouts to shareholders by slashing dividends. Forty-one companies in the 500-member index have cut their dividends this year, compared with 61 reducing payouts of $40.6 billion in all of 2008. But fund manager Don Taylor is still finding dividend-rich investments. "A lot of financial companies have cut their dividends recently, but many other companies in consumer staples and health care have been able to increase their dividend payout," says Taylor, who oversees the $1.35 billion Franklin Rising Dividends Fund ( FRDPX). Taylor buys shares of companies that have increased dividends in eight of the past 10 years and doubled payouts over the same period. He prefers businesses that distribute less than 65% of their earnings, so they still have money left to invest in operations. A company's debt ought to be no greater than half of its capitalization, and its price-to-earnings ratio should be in the lower half of a 10-year range. The result is a fund with fewer than 45 stocks and a turnover rate of 4%, compared with an average of about 50%. The fund has fallen 22% this year and 15% annually over the past three years, 80 basis points better than the S&P 500. Over 10 years, Franklin Rising Dividends has returned 1.8% a year on average, more than five percentage points better than the index, ranking in the top 5% of its Morningstar peer group. Morningstar gives the fund four out of a possible five stars.
Procter & Gamble ( PG) is a top-five holding, accounting for 5% of the fund. P&G has raised its dividend 52 years in a row and now has a yield of 3.5%. Taylor expects the consumer-staples giant to raise its dividend again in April. Procter & Gamble's stock has fallen 30% in the past year, compared with 43% for the S&P 500. Industrial gas maker Praxair ( PX), yielding 2.8%, also is a large holding. Taylor says the industrial-gas business is less economically sensitive than industrial chemicals, which is suffering worse. Praxair's shares have declined 23% over 12 months. "Praxair has a lot of long-term contracts that are very stable and a lot of new projects coming in," says Taylor. "So the impact of the weakening economy on their business is much more modest than a lot of the commodity-type companies." Wal-Mart ( WMT) and Family Dollar Stores ( FDO) may not pay outsized coupons, at 2.2% and 1.7%, respectively, but Taylor likes their low-end appeal during the economic recession, the worst since the 1930s. Wal-Mart has slipped 2% in the past year, and Family Dollar has surged 69%. "Both have increased their dividends for more than 30 years in a row, so they have been doing this for a long time," says Taylor. "With a lot of people trading down more, their sales have held up very well compared to many other retailers that have seen their shares collapse." Taylor says medical-device maker Becton Dickinson ( BDX) has stood up to pressure of health care reform coming from the Obama administration. The company's stock has dropped 23% over a year.
The manager says United Technologies ( UTX) will be able to protect its dividend, even though the company recently announced a massive layoff of 11,600 employees. The company's shares have fallen 39% in the past 12 months. Another conglomerate, General Electric ( GE), cut its dividend for the first time in more than 60 years. "United Technologies is really in a lot of stable, diversified businesses which have maintenance contracts with recurring revenue streams," says Taylor. "The layoffs are unfortunate, but will protect the earnings and allow them to continue the dividend increases they have had in the past."