Seek Companies That Will Increase Dividends: Portfolio Manager

More investors are looking to the equity market as a source of income — but which ones will give you good returns?

Close-up of a pen on stock price chart
Close-up of a pen on stock price chart

Look for companies with strong balance sheets, consistent businesses and that can increase their dividend, not just maintain it, advises Don Taylor, senior vice president at Franklin Equity Group.

Taylor, who manages the $6.6 billion Franklin Rising Dividends Fund, singled out Chevron , International Business Machines Abbott Laboratories , Procter & Gamble , and Wal-mart as his top five portfolio picks.

“They all pay a decent dividend, but more importantly, they have a long record of growing the dividend significantly and consistently year after year,” he said. He also expects these companies to continue posting double-digit growth in the years to come.

Asked whether impending changes to the tax codemight affect performance of these stocks, Taylor said that unless a stock has a really high yield, a higher tax on dividends will not really affect market prices.

“[For] a typical company that has a 1.5 to 3.5 percent yield-dividend growth, I don’t think it affects their valuation. But it can influence the capital allocation decision, which may over time not be positive,” he said.

All his picks have operated in an environment of higher taxes and their success long predating 2003, when the current preferential rates took effect.

“Most of these companies have had 30, 40, 50 years in a row of dividend increase,” Taylor said. “They did a good job with their capital allocation decisions, and for these kinds of companies I don’t think [you’ll see] a particularly bad impact.”

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Disclosure information was not available for Don Taylor or his company.