Before you buy a stock, you need to know that the company has a management team that is focused on what is important to you.
It may sound silly, but consider this: When was the last time you boarded a plane and asked the pilot for their credentials? Or inspected the plane? Or analyzed weather patterns? Yes, that stuff is important, but you first need to know that the plane is flying to your destination.
The question for investors is: What should be important to you?
I recently had the opportunity to speak with Jack Leslie -- currently, a dividend and high-yield focused portfolio manager for Miller/Howard Investments -- and he suggested that if you want to generate dividend income, then you should want management that focuses on the dividend. More specifically, Leslie wants: Management that understands that shareholders own the company, is commited to growing their dividend, and acts with a similar timeline.
Acts in the best interest of shareholders
Management that understands shareholders own the company, Leslie suggests, will focus on maximizing shareholder wealth, protecting that wealth, and returning that wealth to the owners.
One of the best ways to judge this is by looking at the company's dividend track record. Companies have a long list of obligations they have to satisfy before they can even consider paying a dividend. So, if a company is not creating earnings, is undisciplined with expenses, or they are taking on too much debt, you are likely to see the dividend suffer at times.
Real estate investment trusts, REITs, Realty Income (NYSE: O) and Digital Realty (NYSE: DLR) are great examples of companies that meet Leslie's standard.
Both of these companies own and manage large portfolios of real estate that they lease to businesses. For Realty Income, its predominately retail properties, and Digital Realty focuses on data centers.
Because these companies are REITs, moreover, they're required to payout 90% of their taxable earnings to shareholders. This leaves almost no wiggle room for mistakes. So, by consistently paying and increasing their dividend over the past decade, it strongly suggests that they're committed to managing their company responsibly, and in the best interest of shareholders.
Continue to be committed
Of course, there's a limitation to looking backwards. Past results do not predict future returns. So, Leslie wants a management team that will continue to be committed to their dividend in the future.
But who has time to read through all the company filings and conference calls? For this, Leslie suggested a simple solution: Ctrl+F "dividend." That's right, hit control F on your keyboard, and simple search how many times the company references their dividend.
- Are they talking about it a lot?
- What are they saying?
- If not, that can be telling as well, maybe the dividend isn't important?
Here's an example from Digital Realty's 2014 fourth quarter conference call:
"Digital Realty [...] generated the second highest compound annual growth in dividends per share within the REIT industry over a seven and nine year period. Perhaps even more importantly, this growth has been achieved with a low volatility." - VP of finance, Matt Mercier.
Not only is the statistic impressive, but Mercier's tone made it clear that the company takes a lot of pride in its ability to pay and increase their dividend. That bodes well for the company to continue to focus on it in the future.
Similar timeline
According to Leslie, the average holding period among the Miller/Howard funds is roughly four years. So, if a CEO is discussing how they plan to be profitable ten years from now, that doesn't make sense for a dividend-focused investor. But it might for someone else.
Here's a quote from Realty Income's 2014 shareholder letter:
"Our mission, as always, is to manage our real estate assets so that they continue to generate the lease revenue to support growing monthly dividend payments" - CEO, John Case.
The statement not only makes it clear that the company is committed to their dividend, but it also suggests that Realty Income is focused on generating that income today, not sometime in the future.
The right management for you
Great management may be subjective, but the right management for you, is not. So clearly define what it is you want. Are you interested, like Miller/Howard, in generating consistent and growing dividends? What about your timeline: Are you investing for three, five, twenty years, or maybe more?
Consider those questions, and finding the right management team will become much easier.
