Fund manager names 9 dividend growers for total return

The manager of a $47 billion fund is prioritizing dividend growth over high-yield plays, arguing that a focus on total return is key for long-term investors. Michael Barclay, lead manager of the Columbia Dividend Income fund (LBSAX), favors companies with robust cash flow and durable competitive advantages that allow for steady dividend increases.

"We are in the large-cap value box. We buy only stocks that pay dividends, and we approach dividend investing from a total-return perspective," Michael Barclay, senior portfolio manager at Columbia Threadneedle Investments, said in a recent interview with Barron's.

The fund’s approach has resulted in a 12.9 percent average annual return over the past decade, placing it in the top 15 percent of its Morningstar category. While its current dividend yield is 1.6 percent—modest compared to high-yield funds but above the S&P 500's 1.1 percent—Barclay emphasizes that the fund’s goal is for 60 to 70 percent of total return to come from capital appreciation, with the remainder from a consistently growing dividend.

"Stocks of companies that can grow their dividends over time are going to provide that higher level of income that will keep up with inflation," Barclay said. This focus on growth and stability is reflected in the fund's low annual turnover of just 16 percent, which implies an average holding period of more than five years for its 81 stocks.

Financials Forged in Crisis

Financials make up the largest portion of the fund at 19 percent of the portfolio. Barclay highlighted major banks like JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) that emerged from the 2008 financial crisis with strong capitalization and liquidity. He noted their heavy investment in digital and mobile capabilities created a significant competitive advantage in gathering low-cost deposits.

These banks, along with wealth management powerhouse Morgan Stanley (MS), have built "competitive moats that will be tough to undo," according to Barclay. This stability has translated into shareholder returns, with JPMorgan and Bank of America growing their dividends at a compounded annual rate of more than eight percent over the past five years.

Tech's Picks and Shovels

The fund allocates about 16 percent of its portfolio to technology, a higher weighting than the average large value fund. Barclay’s strategy focuses on the "picks and shovels" of the semiconductor industry, which he saw as a burgeoning trend even before the recent AI boom.

He favors companies like Analog Devices, Inc. (ADI), whose chips are integral to the automotive and industrial sectors, and semiconductor equipment makers KLA Corp. (KLAC) and Lam Research Corp. (LRCX). He pointed out that as the installed base of their equipment grows globally, these companies generate consistent, high-margin service revenue.

"Lam is really the only company that can service a Lam piece of equipment," Barclay explained, describing a "flywheel of consistent high-margin revenue that supports the dividend." While their yields are below one percent, both KLA and Lam Research have grown their dividends at a low- to mid-teens rate over the past five years.

Defensive Healthcare and a Contrarian Bet

In healthcare, Barclay looks for defensive names with diverse drug portfolios and strong pipelines. He identified Johnson & Johnson (JNJ), which holds a rare triple-A credit rating, and AstraZeneca PLC (AZN), with a free-cash-flow margin above 20 percent, as key holdings. He believes large pharmaceutical companies are well-positioned to use artificial intelligence to improve the efficiency and success rate of clinical trials.

The fund also holds a position in Altria Group, Inc. (MO), a more traditional high-yield stock. Barclay noted the company's dividend, which yields just under six percent, is supported by strong free cash flow and a successful transition toward smokeless tobacco products.

This article is for informational purposes only and does not constitute investment advice.