Stephen’s Posterous

Facing the worse year for stock dividends since World War II, Judith Saryan holds firm to her mantra, "Dividend-paying stocks are good, but dividend-growing stocks are even better."

Finding them, however, means digging into a lot of balance sheets and debt covenants, says the 54-year-old co-manager of the Eaton Vance Dividend Income Fund (EDIAX).

Saryan says fewer companies will increase cash payments to shareholders in this year, choosing to conserve cash. In fact, Standard & Poor's predicts that dividends paid by companies in the S&P 500 index will plunge 22% in 2009.

Already this year, Pfizer (PFE), General Electric (GE), Dow Chemical (DOW), U.S. Bancorp (USB) and other venerable dividend payers have announced dividend cuts totaling $35.9 billion.

Still, income-hungry investors can find "good dividend plays in every sector," Saryan says.

Founded in 2005, Saryan's fund has fallen 20% in value so far this year. Still, its annualized performance has beaten the S&P 500 index for each of the last three years.

Here are some excerpts from our recent conversation with Saryan:

Barrons.com: Given all the turmoil over the last year, are dividend-paying stocks still good investments?

Saryan: Traditionally, a dividend strategy lowers the variance and the volatility in any portfolio, and provides investors with a consistent income. That's a nice feature in this sort of environment. But while dividend-paying stocks are good, dividend-growing stocks are even better. Companies that hike their dividends send out a strong signal about their financial health.

Q: Many high-profile companies have cut or eliminated their dividend. What do you expect in the coming year?

A: The environment remains a tough one, especially in the financial sector. Companies will trim dividends because they need cash and want to avoid the capital markets. Even companies with lots of cash, and the ability and wherewithal to increase their dividend will take their time before making a decision. Plenty of companies will continue paying dividends, and some will hike them, though fewer than we've seen in past years. Finding these names requires looking at income statements, and balance sheets.

Q: What specifically do you look for?

A: The easiest thing to find on a balance sheet is cash. Also important is the amount of cash generated by the business, or cash flow. But we also look at the amount of debt, and then drill down into the debt covenants to see when the bonds are due to mature. If a lot of debt is maturing soon, the company may choose to hoard cash.

Q: Do you prefer high yields?

A: Don't look for the high yields because they can be the most distressed companies. We prefer names with lower yields and good prospects for hiking dividend payments. We try to avoid cyclical companies with yields of 6% or higher, though we will look at companies with steady, recurring revenue streams, such as utilities, that yield over 6%.

Q: Should a company raise its dividend if profits aren't growing?

A: It can be a reasonable decision if the company has hit a temporary pothole caused by the economy, if there's lots of cash on the balance sheet and management has reason to remain confident in its future. Rewarding shareholders in tough times is a particularly good idea because it may be the only return an investor gets. One note of caution: If a company borrows money to pay a dividend, it's a red flag.

Q: How has your portfolio changed in the current environment?

A: We reduced our exposure to financials in the last year. We do hold financial stocks, primarily insurance companies with business models that have gained our confidence. But our exposure to banks is limited due to worries about the earnings and cash flow, the balance sheet and assets on the balance sheet.

Northern Trust (NTRS) is our biggest bank holding, and it has a very defensible business model. It doesn't lend money or invest in questionable mortgage securities. Instead, it receives fees for managing investment portfolios, and thus has managed to circumvent the balance-sheet problems facing many banks.

Northern's decision last month to return $1.6 billion in TARP funding is a good sign because it means that they don't need the capital. The company hasn't raised its quarterly dividend since October of 2007. But the payment has remained steady at 28 cents a share and given time Northern will be in a position to hike it.

[Editor's Note: On Feb. 27, Northern Trust announced that it would repay a $1.6 billion federal bailout loan as quickly as possible, responding to lawmakers who criticized the company for sponsorship of parties and concerts at a professional golf tournament last month. Company officials said the bank acted within government guidelines by sponsoring the tournament and insisted no Troubled Asset Relief Program money was used to fund the event.]

Q: What financial stocks should investors avoid?

A: Be careful with European banks. Many have too much debt. In fact, looking across Europe, I don't think any banks have balance sheets that leave me feeling comfortable.

Q: Once, financials were a place to go for decent dividend stocks. What sector has taken their place?

A: Telecom has strong dividend potential thanks to strong balance sheets and a consistent revenue stream fueled by consumers who pay them monthly for their services. AT&T (T) and Verizon Communications (VZ) are two of the best names, generating consistent cash flow. AT&T hiked its dividend in January, while Verizon should hike its payment as much as 7% this year.

Vodafone Group (VOD) has an even better dividend-growth profile. We expect the company to raise its dividend 10% in June.

Q: What other names do you find attractive?

A: Wal-Mart Stores (WMT) is increasing sales in a very tough environment by luring shoppers with its low prices and a wide assortment of merchandise. The company just raised its dividend 15%, which is ahead of our expectations for operating earnings growth this year.

Q: What other sectors or stocks should dividend investors fear?

A: Aflac (AFL) worries our analysts. It's been a good dividend name. However, its balance sheet includes a lot of hybrid securities from European banks, which are fixed-income securities similar to preferred stock. We worry that many European banks will not be able to pay the dividend on these securities, and the securities will lose value.

Q: The fund has a high yield. Why?

A: In part, because we employ a "dividend capture strategy," which means we use a small percentage of the fund to purchase positions in companies that are about to pay their dividend and then we move on. It's a way to enhance the fund's yield. We have done it very judiciously, and will keep using the strategy. But I don't recommend it for ordinary retail investors. Success depends on properly timing the purchase and sale.

Q: Can you find good dividend-growing stocks anywhere?

A: I think every sector has a good dividend play, though the information-technology sector can be tough. The sector doesn't traditionally pay as much in dividends as other sectors. But we do like IBM (IBM). The company will raise its dividend about 20% this year.

Q: Thank you for your time.

Source. Subscribe to Barron's. Eaton Vance Dividend Income Fund.

The Bill and Melinda Gates Foundation and a mobile-phone-industry trade group are experimenting with programs that let consumers in Asia, Africa and Latin America access financial services through their cellphones, part of a broader effort to turn mobile phones into a financial tool in developing countries.

The philanthropists and the GSM Association said they studied how existing mobile-finance programs are being used, and are now working with banks, mobile operators, governments and microfinance organizations to pilot 20 new mobile-banking programs. The work is to be funded by a $12.5 million grant from the Gates Foundation, which earlier this year said it would boost investment into programs to promote savings in developing countries.

The GSMA is an industry group that includes leading mobile operators from around the world, such as Vodafone Group PLC, China Mobile Communications Corp. and AT&T Inc. The association is holding its annual conference this week in Barcelona. The partnership is part of a broad endeavor to turn the cellphone into a tool for accessing savings and other financial services in emerging countries.

The explosion in recent years of microcredit plans in developing countries has a host of nonprofits, cellphone operators and governments experimenting with ways of reaching people in rural areas without bank branches. The industry has a model in M-PESA, a payment service in Kenya run by operators Safaricom Ltd. and Vodafone. M-PESA has attracted millions of clients since it was launched in 2007.

While an enticing concept, banking by phone in developing countries faces major obstacles, including a mix of banking regulations that limit how financial services can be offered. In Kenya, those regulations are loose, allowing services such as M-PESA. Indian authorities, meanwhile, are still sorting out their mobile-banking policies.

"This is going to play out somewhat differently in any number of countries," said Bob Christen, director of the Gates Foundation group that invests in financial services for the poor.

Source.