Deep Dive: Financial stocks look ripe for dividend investors

King co-manages several funds, including the $2.2 billion Columbia Dividend Opportunity Fund US:CDOZX. The fund’s objective is to provide a high level of income with a portfolio of stocks, while also seeking capital growth. The fund’s institutional shares have a dividend yield of 3.71% and are rated four stars (out of five) by financial research firm Morningstar.

King said the fund seeks to provide a dividend yield “in the top quartile” of the Lipper Equity Income peer group.

During an interview, King described the fund’s portfolio: “We hold pretty staid stocks that would be appropriate for your oldest living relative.”

He pointed to banks as a group where he and his colleagues have been making adjustments to improve the quality of the portfolio. Bank stocks as a group “have come down so much, and there are many where the dividend is 100% certain, other than by Federal Reserve action.”

King couldn’t comment about recent trades, but here are the fund’s 10 holdings in the financial services sector as of April 30:

You can click on the tickers for more about each company.

You will have to scroll the table to see all of the data.

King is confident in the ability of JPMorgan Chase US:JPM, the fund’s second-largest holding, to maintain its dividend. He said his confidence springs from the annual review of large U.S. banks’ capital deployment plans as part of the Federal Reserve’s stress testing.

In contrast to the 2008 financial crisis, when it became obvious that many large banks needed additional capital, the banks went into the coronavirus crisis “with roughly two times the capital they did last time,” he said.

So he doesn’t expect much dividend-cutting among the large U.S. banks.

Dave King, head of income and growth strategies, Columbia Threadneedle Investments.

Columbia Threadneedle Investments

That said, Wells Fargo & Co. US:WFC (also held by the fund) was the largest bank included last week on this list of 21“potential dividend-cut candidates” from Keefe, Bruyette & Woods. Wells Fargo has been operating under a Federal Reserve restriction against growing its total assets after customer service scandals. It also has a dividend yield or 8.73%, more than twice as high as JPMorgan Chase’s yield.

A yield can indicate a lack of confidence among investors that a company will be able to maintain its dividend. But even though Wells Fargo was on the KBW list, KBW analyst Brian Kleinhanzl wrote in a separate report on May 13: “Ultimately, we believe that WFC has excess capital so the company can continue to pay dividends despite the prospect of not earning the dividend through net income.”

King agrees that “Wells can be a special case” because of its higher level of scrutiny by the Federal Reserve, but for the large banks in general, he sees an opportunity at these discounted prices because the group has been “doing what they are supposed to be doing” by having their capital plans approved by the regulator.

Companies that have recently raised dividends

Looking further into the financial sector, King mentioned MetLife Inc. US:MET as an attractive play after a significant pullback this year, with a yield of 5.80%. The stock “never gets a high multiple [to earnings] because it is not a growth business,” he said. The company raised its quarterly dividend to 46 cents a share from 44 cents on April 28.

Other holdings of the fund that have recently raised dividends include Johnson & Johnson US:JNJ, which increased its quarterly dividend to $1.01 a share from 95 cents on April 14, and Procter & Gamble Co. US:PG, which raised its quarterly payout to $0.7907 a share from $0.7459.

King said, “it’s a very interesting signal” for a company’s management and board of directors to be confident enough, even heading into what may be a severe recession, to increase dividends.

Dividend cuts

King said he was able to sell the fund’s shares of Delta Air Lines Inc. US:DAL before the company suspended its dividend on March 20. The fund also sold its holdings of Suncor Energy Inc. US:SU, several months before the company cut its quarterly dividend by 55% a share on May 5.

But four holdings of the fund have cut dividends so far during the coronavirus crisis.

• General Motors Co. US:GM suspended its dividend on April 27.

• Las Vegas Sands Corp. US:LVS suspended its dividend on April 17.

• Western Digital Corp. US:WDC suspended its dividend on April 30.

• Extended Stay America Inc. US:STAY lowered its dividend to a penny a share from 23 cents on May 6. King said it “made sense” when the company articulated clearly that the dividend cut was temporary. During the first-quarter earnings call with analysts on May 7, Extended Stay America CFO Brian Nicholson referred to “the extremely tough decision to temporarily reduce our dividend in order to preserve liquidity and to preserve optionality at such time as the operating environment improves,” and said once business trends are “more normalized,” the dividend would be reviewed.

“This is going to be very important for income-oriented investors — owning a company where if you do cut, you have an understanding of when it will be restored,” King said.

The fund’s largest holdings

Here are the Columbia Dividend Opportunity Fund’s 10 largest holdings as of April 30: