Transcript:

In a low-rate world, the successful strategy over the last three or four years has been to chase dividend yield. I think that’s really dangerous today, for two reasons.

Number one, if the Fed continues raising rates, those dividend yields will not be as competitive as they used to be. But, more importantly, there are a bunch of companies out there that have increased their payouts, how much of their earnings they’re paying out, to unsustainable levels. A high-dividend payout ratio by itself is not dangerous, but when it comes with the absence of earnings growth, that’s something to really watch out for. There are a few companies out there that have taken their payouts from 50% up to 80%, such that today they’re borrowing to pay their dividend, buy back stock and put money toward capital spending. That’s just absolutely unsustainable, so you need to count on earnings growth, and a lot of these companies don’t have that earnings growth today. So, watch out for those high-dividend payers with very high payout yields.

I’d actually say a better strategy would be to find companies with great earnings growth without dividends or with very low payouts, but those that could increase their dividends particularly as maybe we get tax repatriation and have the ability for some multinationals to bring cash home. That’s a real opportunity, in my view, as opposed to those companies that are stuck in the box of paying out way too much of their earnings today.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams.