Q:  Could you provide some examples that illustrate the dividend capture strategy?

A: The dividend capture strategy works on two levels; geographic rotation and stock rotation. On a global basis because the different markets have different dividend payment periods, this allows us to rotate assets across the globe and even within sectors. For example we tend to favor the UK in February and March when their key dividend season starts, we can then rotate into mainland Europe through May to June and onwards into Hong Kong, which tends to have a late June payment season.

We can also capture dividends by stock because different companies around the world have varying payment schedules. The U.S. has the unique model of quarterly dividends and, obviously, if you rotate the assets every quarter, you would incur great turnover. However, if the dividends are annual or semiannual payments, which is the case in most parts of the world, dividend capture is a viable strategy that enhances the income flow. We are not too aggressive in the rotation and the turnover of the fund is about 200%. For example we could own a US telecom stock in the first quarter to pick up a quarterly payment, before rotating into a UK telecom with a large semiannual payment in late March. By the middle of the year this holding could be recycled into a French telecom paying a large single annual payment in June and onwards.

We are very sensitive to the price and the value, so we aim to identify stocks a couple of months ahead of the ex-dividend date. At that point, the dividend is not reflected in the price at all, so it is very important to buy the stocks early enough. Once they go ex-dividend, we are able to get out of the companies with the dividend and hopefully a small profit. Occasionally, we do take losses but these are usually offset with the large dividend we have taken. The strategy is useful for reducing the fund’s capital gains, while maximizing the income produced. The majority of the fund’s total return should be in the form of income.

Q:  How many companies actually pay out dividends? I believe that the number of these companies in the U.S. is quite low.

A: The fund is oriented towards international investments and the U.S. is unlikely to represent more than 20% of the portfolio for two reasons. First, the dividend yields in the U.S. are lower than in Europe, the U.K., and Asia Pacific. Second, because of the equal quarterly dividends, the dividend capture model does not work in the U.S. that well.

Q:  A stable income stream depends on a stable revenue base and, respectively, on stable industry dynamics. How do you evaluate the industry dynamics, which can be a challenge in many parts of the world?

A: I don’t think that relationship is crucial because even the cyclical companies can be attractive dividend holdings. The key element is the payout ratio. Obviously, the earnings can fluctuate but the payout ratio moves up and down to keep the dividend growing. Cutting the dividend is a very rare event because the result would be losing shareholder confidence. Actually, the dividends are far more stable throughout the economic cycle than the earnings.

Therefore, targeting stable industries is not a must. Of course, we do love industries with stable cash flows, such as tobacco and utilities, but at the right point of the cycle, less stable companies also make great investments. In this strategy, timing is the key, as well as understanding and the experience of managing through a few cycles.

Q:  It is one thing to identify dividends and another to generate a stable return for a fund. What are the milestones of your buy and sell discipline?

A: The key factor behind the buy and sell discipline is the dividend capture strategy, combined with the valuation-driven selection process. In general, we are buying on a three-month period. Once the stock gets exdividend, we are looking to move on. Because we are not too greedy, the ex-dividend date turns out to be quite a good moment to sell the stock with a small capital gain in addition to the dividend.

Having a strict sell discipline is probably the most difficult thing for any fund manager because managers tend to fall in love with stocks and keep them for too long. Because we always look for dividend opportunities, we have to release capital from our portfolio. As value managers, we have price targets for the stocks we hold, but we also question every holding as it moves through its ex-dividend date.

Q:  Typically, when the stock goes ex-dividend, the value of the stock declines by the amount of dividend. Do you wait until it bounces back?

A: It is essential to buy months ahead of the ex-dividend. If you bought the stock the day before the ex-dividend date, obviously, you would be converting capital into income. That is why the entry level is critical. In a typical scenario, if we have bought the right stock at the right time, we would still make a small capital gain after the ex-dividend date.

In our process, there is a huge amount of stock selection involved and we are holding companies that we believe can appreciate over that period. Quite often, there is an earnings announcement because the dividend is announced with the earnings and we are taking a view on those earnings. The process involves company meeting and a careful analysis of the value.

Overall, we are very selective and we identify a small amount of stocks, not necessarily the ones with the highest yields. I believe that it requires genuine skill to make the judgment of buying the right stocks at the right level and not be seduced by the highest yielding opportunities.

Q:  What risks do you see and how do you manage them?

A: We are not at all benchmark conscious; rather, we are driven by our yield performance. Since we invest in dividend-paying stocks, we invest in companies with strong cash flows and lower risk. The non-yielding stocks may have greater profit potential, but our stocks carry less risk because they have to generate profits to pay dividends. I also believe that the yield is better core valuation measure than the P/E because it can be directly related to cash and bond yields.

We also mitigate risk through our geographic exposure, or through being in many different markets around the world. Those markets have their own different economic cycles, so owning the stocks from similar industries in different markets allow us further diversification and risk reduction. Currently, we have exposure to 19 countries. We also control risk through certain limits, such as a limit to 10% on the largest holding, as well as sector exposure limits.