Our dividend-paying portfolios are ultimately looking for companies that have the ability to both grow their businesses and return cash to shareholders. Portfolio Manager and Principal Jay Kaplan talks with Co-Chief Investment Officer Francis Gannon about the differences between Total Return and Dividend Value Funds and explains why we focus more on total return than we do on yield.
Francis Gannon: Let's talk about some of our dividend portfolios here. There are two portfolios that we have, Total Return Fund and Dividend Value Fund. I was wondering if you could take me through the difference between the two portfolios.
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Jay Kaplan: Well, there are a couple of differences. The Total Return Fund is a bigger fund and an older fund than the Dividend Value Fund, number one. Number two, the Total Return Fund has more stocks in it than the Dividend Value Fund does. And number three, the Dividend Value Fund has more international exposure than does Total Return.
But at their core, fundamentally, they're trying to do the same thing, and that really is investing for total return. So what that means is they're not trying to invest to find the biggest dividends that you can find in the world—it's to find really good companies with good cash flow profiles that allow them to return cash to shareholders for a total return, not for a big coupon.
Francis: So let's spend some more time on that. How should an investor in the small-cap space think about dividends?
Jay: Well, it's interesting, people generally don't think about small-cap companies as paying dividends, and somewhere in the neighborhood of a third of them do.
We think that dividend payments are a really good indicator of good capital allocation. We often hear, when we talk about small-cap companies, small-cap companies are growth companies and growth companies can't pay dividends, because if they do, it shows that they have no way to grow.
We think that dividend payments and growth don't have to be mutually exclusive. We think companies that are free cash flow generating can still reinvest in their businesses and do all those things they need to do to grow and still can return cash to shareholders. And that's the kind of thing we're looking for.
Francis: Does that make us have biases in certain sectors?
Jay: I think it tends to in our dividend-paying funds. Over time you tend to see we have a lot of financial services exposure and we have a lot of industrial exposure, and I think that makes sense because that's where the dividends are.
Francis: And conversely we don't have a lot of REIT or Utilities exposure.
Jay: We don't. Even though those companies tend to pay very high dividends, they tend to also have leveraged capital structures in order to show the returns that they do, and one of our core principles—one of our key risk-mitigating principles—is to try and avoid companies that run with highly leveraged balance sheets.
Francis: When we think about the Dividend Value Fund, is the portfolio more dividend focused or yield focused?
Jay: It's total return focused, and really what it is is a collection of businesses that either pay dividend or have the ability to pay dividends. We are not out hunting for yield. We're hoping to help people compound their wealth over time, and if they can put a little change in their pocket in the form of dividends along the way, we think that's a neat idea.
Important Disclosure Information
The thoughts and opinions expressed in the video are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements. There can be no assurance that companies that currently pay a dividend will continue to do so in the future.
This material is not authorized for distribution unless preceded or accompanied by a currentprospectus. Please read the prospectus carefully before investing or sending money. Royce Total Return Fund and Royce Dividend Value Fund invest primarily in small-cap and micro-cap stocks and micro-cap, small-cap, and mid-cap stocks, respectively, which may involve considerably more risk than investing in larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.) The Funds' broadly diversified portfolios do not ensure a profit or guarantee against loss. The Funds may invest up to 25% of their net assets (measured at the time of investment) in securities of companies headquartered in foreign countries, which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing Foreign Securities" in the prospectus.)