Capital IdeasTM

Investment insights from Capital Group

Sustainable dividends: The pursuit of quality and prudence
Aline Avzaradel
Equity Portfolio Manager

With the fight against inflation still under way amid the banking turmoil, dividend-income investment opportunities could grow in importance and play a significant role in total return. In this interview, Aline Avzaradel, portfolio manager of the Capital Group Capital Income Builder strategy, explains her focus towards dividend sustainability, as well as the need to avoid dividend cutters, which can undermine a portfolio’s long-term return potential.

Experience has shown Aline that the holy grail to dividend investing is to seek attractive yield with strong and consistent dividend growth prospects. An important part of that is dividend sustainability – a company’s ability and willingness to pay dividends. It is sustainable growth, not high growth, that is key to long-term dividend investing.

The way she assesses dividend sustainability can be illustrated using the following diagram – the intersection of which shows the dividend payment history, which reflects both its ability to pay as well as management’s commitment to consistently pay and grow the dividend over time through various market cycles.

Assessing dividend quality and risks from dividend-paying history

Venn diagram

Source: Capital Group

Refer to the investment insights paper “Dividend growers: The secret sauce of sustainable growth” for the comprehensive dividend ratings process developed by Capital Group’s Quantitative Research & Analytics group.

Meanwhile, anticipating and avoiding dividend cuts are not only a function of protecting the income generation of the portfolio, but also impact the overall portfolio return as, historically, stocks that cut dividends tend to fare worse than steady dividend payers and dividend growers

While management engagement is important, there is also a need to actively consider the scenarios in which a company might cut its dividend to calibrate the narrative we are hearing. Assessing the composition of the board of directors is also a key part of this process as ultimately it is the board that declares the dividend.

Aline Avzaradel is an equity portfolio manager at Capital Group. She has 20 years of investment industry experience and has been with Capital Group for 18 years. Earlier in her career at Capital, as an equity analyst, she covered U.S. insurance companies as well as the apparel industry, nonalcoholic beverages and packaged food companies. Prior to joining Capital, Aline was an investment banking analyst with Morgan Stanley in New York. 

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Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.