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Fund manager: Investors would be wise to go slowly

Friday - 8/3/2012, 1:02pm  ET

By MARK JEWELL
AP Personal Finance Writer

BOSTON (AP) - In an era when high-frequency traders exploit split-second stock price movements, Don Taylor sounds like a throwback to a different time. The manager of the highly rated Franklin Rising Dividends mutual fund talks about stock-picking almost like someone evaluating a potential spouse.

"We're trying to find good companies, and sticking with them," Taylor says, "unless they get too expensive."

Taylor's fund (FRDPX) exemplifies the patient approach to investing that most believe wins out over frequent trading.

He cites Becton Dickinson, a medical device maker added to his stock portfolio in 1996, shortly after he began managing Franklin Rising Dividends. That stock has remained in the fund ever since and frequently has been among the top holdings. So has discount retailer Family Dollar, a stock inherited from his predecessor.

Both have appreciated sharply during Taylor's tenure, but the biggest payback has come from dividend increases. Becton Dickinson's annual payout is $1.80 a share, compared with 23 cents when Taylor bought the stock. The company has increased its dividend 40 consecutive years, thanks to steady demand for its surgical tools, syringes and other medical devices. Around $74 now, the stock has nearly quadrupled since Taylor bought it.

Few of the fund's stock picks have worked out that well, but it's hard to argue with the results at Franklin Rising Dividends, which Taylor runs with three co-managers. Had someone invested $10,000 at the fund's inception in 1987, they would have ended up with $83,797 through June of this year. The fund has a 4-star rating based on its record, and Morningstar analysts give it a bronze-medal rating based on their assessment of future prospects.

The appeal of dividend income hasn't been lost on investors in an era of ultra-low yields for many bond investments. Mutual funds specializing in dividend-paying stocks have been consistently attracting new cash, while money has been pulled out of other stock fund categories. Franklin Rising Dividends attracted about $2 billion in net deposits last year, and has grown to $7.9 billion in assets.

But it's not a given that dividend-paying stocks will keep on delivering. Companies can cut or eliminate dividends, as many banks did in 2009 to conserve cash coming out of the financial crisis. And many investors focus too much on a stock's current dividend yield, which doesn't indicate whether a company will be able to maintain that level of payout long-term.

In a recent interview, Taylor discussed how he selects stocks, and offered insights about dividend investing. Here are excerpts:

Q: How does your fund narrow its list of potential stocks to buy?

A: We run stocks through five screens. For starters, they must have increased their dividend payments in eight of the past 10 years, and not made any dividend cuts during that time. And overall, they must have doubled their dividend over those 10 years. On average, the companies in the fund's current portfolio have increased their dividends 29 years in a row. The vast majority of them kept on increasing dividends through the financial crisis.

Q: Becton Dickinson has been a strong performer for your fund the past 16 years. But you must have had doubts about the stock at some point. What's kept you in?

A: I don't recall the market ever getting particularly excited about the stock. But this company just grinds away, and it works. It doesn't have to be spectacular.

Q: It's relatively easy to select stocks with high dividend yields (the amount of the annual dividend, divided by the share price). But it's another matter to find stocks that are likely to continue increasing their dividends. How do you go about that?

A: Think about what the yield on the stock is going to be five, 10 or 15 years from now, based on today's price. I spend lots of time focusing on the characteristics of a business, and whether it can consistently and predictably grow, and therefore enable the dividend to grow. If it can, it will work. The stock may languish in any given year. But I'm not focused on beating a benchmark on a quarterly basis, as long as the underlying growth prospects are there. I want the dividend growth to come from a company's business growing, not simply from a payout ratio increase.

Q: Technology companies have become the second most-generous dividend-paying industry group in the S&P 500, and now even Apple is going to pay a dividend. Do you see lots of opportunity in tech stocks?

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