Surprising almost everyone with some skin in the game, the U.S. Federal Reserve is tentatively planning two more interest rate hikes before the end of this year. Although the nation's central bank kept its current target federal funds rate steady when it had a chance to raise it on Wednesday, the Fed's governors remain concerned that falling inflation is still a little too high.
And that's an understandable concern for income investors. The economy isn't exactly on a firm footing as it stands right now. Higher borrowing costs could inadvertently push it into a recession.
Before panicking, though, know there are plenty of dividend-paying companies that can overcome such a headwind to not only continue paying their dividend but continue raising their dividend payments. Mutual fund company T. Rowe Price Group (TROW 4.77%) is one of these names you'll want to consider scooping up in light of the current economic backdrop.
A closer look at the mutual fund business model
Most investors have likely heard of the company. T. Rowe Price manages more than $1.3 trillion of investments through 150 traditional mutual funds as well as several exchange-traded funds.
Like any fund company, brokerage firm, wealth management outfit, or investment bank, T. Rowe Price's success is somewhat tethered to the broad market, which is, in turn, tethered to the economy. Shareholders would much rather own it in good times than bad.
There's a common misunderstanding in how the fund industry ultimately works, however. That is, while a bull market is certainly good for business, a bear market isn't necessarily devastating.
See, while hedge funds might be paid based on their performance, conventional mutual funds charge a nominal fee based strictly on the amount of money you have in a particular fund with that company. The T. Rowe Price All-Cap Opportunities Fund (PRWAX -0.43%), for instance, charges its owners 0.81% of their total position in the fund each and every year they own it.
That's not a lot. And that's the point. It's a fairly cost-effective way for ordinary investors to enjoy professionally managed money.
It's still worth while for T. Rowe Price, however, given that the sum of all the money held by its All-Cap Opportunities Fund is north of $8.5 billion. As long as those investors stick with the fund even in turbulent times, the fund company is collecting reasonably steady revenue. This translates into reliable cash flow, which ultimately supports reliable dividends. Dividend growth is simply supported by the market's ever-rising long-term tide and the company's ability to continue attracting new investors.
T. Rowe Price boasts an impressive track record
That's easier said than done, to be clear. Some investors do cash out and close their accounts at the first sign of economic trouble. Moreover, profit margina for fund companies tend to already be on the thin side. A sudden market crash not paired with an equally drastic reduction in expenses can get messy. The fund business also is pretty darn competitive.
By and large, though, T. Rowe Price knows how to roll with these punches and keep the impact of weak markets to a minimum, and keep the bulk of its investors on board. It doesn't hurt that the company manages non-equity funds as well, like bond funds. These alternative funds often become attractive options when stocks aren't performing well.
Evidence of this resiliency lies in the company's long-term revenue and per-share profit history. Both have ebbed and flowed with the broad market -- the S&P 500 (^GSPC 1.02%) -- going back to the 1980s. More to the point, though, both have more than bounced back when the market did the same.
Data source: YCharts.
Where this resiliency truly starts to shine through, however, is when it comes time to fund the dividend during tough economic times. Even stripping out the one-off special dividends that cause the occasional quarterly dividend to shoot higher (resulting in a clear spike on the graphic below), T. Rowe Price's full-year earnings have been more than adequate to fully fund its payout since the 1980s. That's been the case even during recessions.
Data by YCharts.
Sure, there are a couple of instances where quarterly earnings did slump below the company's quarterly dividend payment. One of them was just a couple of quarters ago, in fact, when the market was tumbling and inflation was still elevated.
Don't sweat these instances too much, though. As was noted, rapidly changing circumstances may catch the fund industry off-guard in the short run, but T. Rowe Price can adapt pretty quickly if and when it needs to. And truth be told, it doesn't really need to do so often. The economy and the market are quite self-correcting anyway, quickly restoring this company's capacity to generate profitable revenue.
Weigh the odds realistically
Never say never. There may well come a time when T. Rowe Price becomes incapable of maintaining its streak of dividend growth or even paying a dividend at all. It would take a prolonged global economic calamity, but anything's possible.
As an investor, though, a big part of your job is weighing risk against potential reward. Given its history and the nature of the business itself, the risk of that happening here is very, very low. The odds firmly favor T. Rowe Price maintaining its 37-year streak of annual dividend increases. You can plug into that track record while the dividend yield's a very respectable 4.4%.
