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The implementation of our Equity Income process begins with a 1500 member universe to identify larger cap, higher quality stocks which currently pay a dividend. This universe of approximately 350 companies is screened for dividend persistence, quality and valuation.
The strategy's dividend analysis seeks stocks that have paid a dividend in each of the last 3 years, have had no dividend cuts during that period and have exhibited dividend growth of 5% annually. The company's actual cash flow is compared to its indicated annual dividend and highly leveraged companies are eliminated. Valuation screens rank a stock in each sector according to its current yield relative to its 10 year maximum yield.
Stocks that rank highest, based on these measures, comprise a buy candidate list of attractive ideas. Holdings that rank poorly on any of the same measures or exhibit deteriorating fundamentals are candidates for sale.
Buy candidates, as well as existing portfolio holdings are subject to fundamental analysis. This research effort may include both direct company contact as well as outside analytical research. The analysis focuses on the integrity and quality of management, earnings and cash flow indicators, balance sheet validity, the competitive environment for the industry and the macro economic themes affecting the sector.
Portfolio construction is executed by the portfolio manager who determines asset allocation, sector concentration and security selection. Portfolios typically hold between 40 and 50 securities and may hold cash in the absence of attractive investment ideas.
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