We generally invest our clients’ accounts in one of two specific strategies. Each has its own unique advantages and disadvantages, but the overall goal is to earn high average returns without incurring a permanent loss of capital. We do this by investing in what we believe are underappreciated/underpriced securities trading at prices below what they are worth.
Depending on account size and preference, we use a variety of investment types to fulfill each strategy. For smaller accounts we might use a combination of mutual funds and/or ETFs, and for larger accounts we will likely use mostly individual stocks.
A substantial portion of shareholder returns have been derived from dividends. Our Dividend Growth strategy invests in companies that pay their shareholders dividends—and can grow those dividends, primarily through pricing power and a well-executed corporate strategy.
The benefit of investing in a strategy that generates a growing stream of dividends is that it somewhat mitigates the impact of market volatility, timing and risk. Our clients (shareholders) should continually receive a stream of cash from their portfolio and own shares of great companies that have the potential to appreciate in price over time.
Desired Attributes – We look to invest in companies that are stable, mature, dominant and that earn high profits and pay out cash dividends with a capacity to grow them. These companies often share certain key traits: management teams that allocate their capital in a disciplined way, a thoughtful corporate strategy, and strong underlying fundamentals. This is about much more than just current yield — these investments, by our analysis and opinion, must offer appreciation potential and be able to grow their dividends. We generally avoid investments with depleting assets.
Value – We apply the same valuation methodology to the Dividend Strategy as we do to the Capital Appreciation strategy. It is important to note, however, that one benefit of dividends is that they are true cash taken in by the company and paid back out to the shareholders. Dividend payments can reduce the risk posed by aggressive accounting practices that companies might employ to overstate their earnings.
Conservatism and Margin of Safety – We seek a margin of safety in the stocks of the Dividend Strategy, but dividend paying stocks can be sensitive to interest rate changes. We seek companies that will thrive and be able to support and increase their dividend in a rising rate environment.
It is interesting to note that over an extended period, stocks that initiated or increased their dividends outperformed other stocks with no dividend policy. However, it is important to know that past performance does not guarantee future results.
Only companies that pass our rigorous value criteria make it into the Townsend Dividend Strategy. The Townsend investment team chooses companies—or eliminates them—following careful evaluation of each company’s:
1 Dividend track record and capacity to grow dividend in the future;
2 Ongoing business performance and how well it meets the Townsend standards; and
3 Stock price and the discount where it trades versus Townsend’s measure of intrinsic value.
Our sophisticated stock selection approach coupled with thorough ongoing oversight creates a strategy with low investment turnover. It is intended to help you achieve your financial objective of receiving cash and participating in long-term appreciation.