After running a high-dividend strategy for 15 years in separately managed accounts, Miller/Howard last year launched the Destra High Dividend Strategy Fund (DHDCX) in a sub-advisory role. Portfolio manager Jack Leslie discusses the fund’s objectives.
Kate Stalter: Today’s guest is Jack Leslie, portfolio manager at Miller/Howard and the Destra High Dividend Strategy Fund.
Jack, as I understand, Miller/Howard is the sub-advisor of the fund. Tell us a little bit of the history of this strategy. Were you managing this type of strategy as separate accounts prior to the time the fund was formed?
Jack Leslie: Yes, we were. We’ve been managing the Destra High Dividend Strategy Fund for almost a year, but before that we’ve been managing the high-income dividend strategies for about 15 years. This month is actually our anniversary.
The team at Miller/Howard has been doing this for a long time, and we think of ourselves as dividend managers, not just value managers that happen to have a yield. We really look for three things: High dividend yield, growth of dividends, and financial strength.
Kate Stalter: I wanted to talk a little bit about where the fund falls in the overall style box. I was looking at the Morningstar data, and I noticed that it was in the large-cap value area. Explain why it might fall into that particular style box.
Jack Leslie: Well, we don’t fit neatly into the style boxes. We really go all-cap. We have a team of portfolio managers who are looking for high-income stocks, wherever they find them.
So if we have small-cap stocks, we’ll invest in small-cap stocks. If we have large-cap stocks we’ll go there, or mid-caps. Wherever we see the opportunity to fulfill our three goals, that’s where we’ll go.
Right now, the fund has a bias towards large-cap stocks, so we have a lot of large-cap pharmaceuticals, and that’s skewing the portfolio up towards large-cap value. But the fund will move around somewhere between core in value and large cap and probably mid-cap, on average.
Kate Stalter: Now, I wanted to kind of come back to the question of high dividend and what the definition of that might be. Is this high yield? Is it accelerating dividends? What are you looking for, more specifically?
Jack Leslie: Well, we’re trying to get a balance between high dividend yields and growth of dividends. We like the high-dividend yield because it gets the mathematics of compounding working for the investor.
We use the high dividend income to buy more high-income stocks, and then that generates still more dividend income, and that keeps getting rolled over into still more high income, and so on. This creates a virtuous circle that grows well.
Now, we like dividend growth not only to keep up with inflation—and that’s something that bonds can’t do for you—but because the rising income helps to pull up the value of the asset producing that income. As a stock generates more and more income, it’s worth more and more money. In our 40-stock portfolio, last year we had 35 dividend increases. So we’re really very good at finding growing dividends.
Kate Stalter: From the way you were describing that just now, is this really total return that you’re looking at?
Jack Leslie: Well, we certainly are looking at a total return. But if you look at studies that have been done since 1972, Ned Davis has done a study of stocks in the S&P 500 by dividend yield. And what you find is that all stocks in the S&P 500 are up about 7% on an annualized basis since the end of January 1972.
Stocks that have rising dividends are about 9.5%. So pursuing a dividend strategy and a dividend growth strategy, by definition, becomes pursuing a total return strategy, because they do just go together.
Kate Stalter: I want to talk a little bit about some sectors, and even a couple of holdings if you’re able to do that. You mentioned pharmaceuticals a few minutes ago. A lot of people, when they think of dividends, these days it may be energy sector MLPs or utilities. But what areas do you like right now?
Jack Leslie: Well, we, as I said, we had been in the pharmaceuticals, large-cap pharmaceuticals, and we had gotten into those probably in 2009, and the valuations have come up dramatically since then.
Right now, we’re looking a lot at energy stocks. One of the largest holdings in the portfolio is NiSource (NI). NiSource is a great story.
The yield on it is a little bit below 4% now, so it’s getting kind of a low yield for the portfolio, but they have two pieces to their company. They have distribution—local gas and electric distribution companies in the Midwest—and they have the old Columbia gas pipeline system that runs pipelines from the Gulf of Mexico through the Marcellus Shale up into the northeast.
The story for us has been the pipelines. I mean pipelines are great—you mentioned MLPs. All the pipeline companies, no matter how they’re structured—as C corps or MLPs, and this fund does invest in MLPs—but all of the pipelines have great businesses, they have long-term cash flow, they have long-term customers, and really lower energy prices, lower gas prices, increases demand for gas. And there’s more gas that has to get transported, and that’s where they make their money.
So for NiSource, especially going through the Marcellus, that’s great for them because they have rights of way. They have the land corridors, too, for their existing pipelines, as there’s more and more production in the Marcellus. No matter which exploration and production company is bringing in gas from the Marcellus, they all have to transport it to market. And since NiSource has the pipelines running through there, it’s going to increase the utilization of their pipelines going through.
And since they have these land corridors, these rights of way, they’ll be able to lay additional pipes right next to their existing pipes and transport still more natural gas.
On the other half of NiSource is the gas and electric distribution companies. They’ve been getting some rate relief with that, and they’ve started increasing their dividend again. So NiSource is just a great story for us.
Kate Stalter: Just one final question for you today, Jack: Generally speaking, what’s the holding period on the stocks in the fund? How often are you exiting or entering new positions?
Jack Leslie: We like to think about a three-year time horizon. Lately, though, we’ve been holding stocks. We’ve had a real good crop of issues, and we’ve been able to hold them longer, and we’re probably closer now to an average four-year time horizon. But we’re pretty much looking at a three right now.
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