Now that the full extent of the market rout in 2022 is coming into view, some investors are reassessing their strategies and, in some cases, starting to consider dividend stocks and dividend-focused funds.
Record dividend payments in 2022
It’s no secret that 2022 was a bleak year for stock returns. However, companies in the S&P 500 paid out a record $565 billion in dividends throughout the year. Data from S&P Dow Jones Indices reveals that dividend payouts from the index grew an impressive 10% year over year.
In a press release in January, analyst Howard Silverblatt of S&P Dow Jones Indices said 2023 should bring another record year for dividend payouts—even in the event of a “full recession.” He expects rising interest rates and bond yields to “exert upward pressure on dividend payouts,” adding that competition for income will increase.
Of course, dividends aren’t the only way company managements incentivize shareholders to own their shares. Buybacks are another popular strategy, although some fund managers prefer dividends over buybacks for several reasons. In fact, investors who are considering buying into a company because of share buybacks should watch for a red flag.
Former PIMCO portfolio manager Austin Graff of Opal Capital, which just launched in 2022, warned that while many tech companies are buying back shares, they’re not reducing their share counts because they’re handing out stock-based compensation to executives and key employees — and issuing new shares to do it. In some cases, these companies are increasing their share counts even though they’re repurchasing shares.
A moral contract
Graff also prefers dividends because they act as a “moral contract” with management.
“For management to return capital to shareholders, it’s very public,” he added. “What companies are paying every quarter or year, they’re creating a moral contract to keep that up, or their stock faces negative ramifications. But they do buybacks when they want to, and there are negative consequences to buying back stocks at highs, not lows. It’s the opposite of what we would want to do with our own money.”
Warren Buffett and other high-profile investors speak very highly of dividend stocks. He added that if management teams did repurchase their shares at lows rather than highs, it would be great, but that’s not something most companies end up doing.
While dividends are anti-dilutive, many tech companies are in unique situations with heavy stock-based compensation. As a result, their stocks have declined as such companies lay off significant numbers of workers.
“Think of what that means,” Graff explained. “If they pay X dollars, and their stock’s at $100, they issue fewer stocks to that employee than if they’re paying X dollars and the stock is at $50. If the stock goes down, it creates more dilution for stock-based compensation than what was experienced at higher stock prices.”
How Warren Buffett rakes in billions on dividend stocks
Warren Buffett also likes dividend stocks, and it’s easy to see why. In fact, dividend stocks are one of the reasons the legendary value investor outperformed in 2022. Buffett’s Berkshire Hathaway is expected to generate over $6 billion in dividend income in the next 12 months.
Nearly half of Berkshire’s dividend income is estimated to come from only three stocks: Chevron CVX , Occidental Petroleum OXY and Bank of America BAC . Other top dividend payers for Berkshire include Apple AAPL and Coca-Cola KO .
Aside from Graff and Buffett, others started to see the value in dividend stocks in 2022. According to MorningstarMORN , investor interest in dividend-focused funds has jumped after the robust performance put up by dividend-paying names last year. Monthly net sales of the 128 U.S. equity funds with “dividend” in their names have jumped since the fall of 2021, while sales of those without “dividend” in their name have dropped.
Morningstar reported that dividend funds averaged a loss of 6.68% in 2022, versus the Vanguard Total Stock Market Index’s 19.6% plunge, which was similar to the average loss of other U.S. equity funds that don’t focus on dividends. One reason dividend funds performed better in 2022 is the lack of technology exposure.
Another reason is valuation. Last year, investors started to refocus their attention on valuations and multiples. Morningstar revealed that the price multiples of the companies that dividend funds tend to own are below the stock index average.
Protecting their dividends
At the end of the day, fund managers aren’t the only ones with a preference for dividends over buybacks. When the going gets tough, corporate managements have demonstrated a preference for protecting their dividend payments at all costs, meanwhile sacrificing their share repurchases to ensure their ability to keep paying their dividend.
S&P Dow Jones Indices reported that buybacks reached a new record in the first quarter of 2022 at $281 billion but declined in the second quarter to $220 billion and in the third to $211 billion.
While share buybacks ticked higher in the fourth quarter, Silverblatt said it may have been because companies accelerated their purchases to avoid the new 1% buyback tax that went into effect this year. In fact, that new 1% tax is one reason some fund managers prefer dividends over buybacks.
On one hand, a 1% tax isn’t much, but on the other, once a tax is in place, it creates the possibility of increasing that tax over time.
For centuries, managers have been befuddled by team dynamics, particularly why some team members hit it off in a heartbeat while others simply don’t. Moving from anecdotes to data-based best practices took humankind all the way until 2012, when Google embarked on a two-year journey to find an answer to what drives effective teaming once and for all.
What they found laid the foundations for modern corporate team building as we know it today. The results of Project Aristotle, as Google called the study, are simple: After hundreds of interviews and two years of data-crunching, the study found that the best performing teams share five particular features in common, namely psychological safety, dependability, structure and clarity, meaning, and impact.
All of this sounds self-evident today, which is partially testament to how far and wide the findings have trickled down through MBA courses and leadership self-help books over the past decade. Some of Google’s findings were markedly more counterintuitive, including why consensus-driven decision making, co-location, individual performance, and extroversion seem to have little to no impact on their effectiveness.
Even though Project Aristotle wrapped up long before anyone had heard of the metaverse or quiet quitting, the study is well worth any manager’s time today. First, given everything we know of millennials and Gen Z, it’s clear that many of the five tenets that are driving performance have become only more important over time, particularly psychological safety, meaning, and impact.
It is equally clear that our workplaces have adopted practices that are failing employees miserably by over-managing for structure and clarity to the detriment of all other drivers of teaming success.Not knowing where employees are and what they are doing presents real discomfort. In response, many managers have doubled down on clarifying roles and processes in a way that would make Frederic Taylor look like a slouch.
Daily check-ins and check-outs, software assisted monitoring, and hourly production breakdowns have become increasingly prevalent ways for managers to regain a resemblance of control over their minions who might or might not be logging in from Aruba at any given moment.
At the same time, managers across disciplines have adopted Agile ways of working in hopes of replicating the successes the process has brought to the field of IT development in particular. There is much good to be said about Agile for good reason, but when applied with the wrong intentions, it can quickly turn into micromanaging on steroids.
The first casualty of over-compartmentalization and overmanagement of work is the ability of employees to self-actualize and find meaning and impact in their work. Omnipresent monitoring and hourly timesheets also wreak havoc on dependability, making it a matter of rote compliance instead of a carefully cultivated sense of trust and accountability.
Now to the good news: Hybrid, and full-remote workforces are absolutely compatible with effective teaming. Here are two ways to help you push the pendulum back toward a more balanced approach across the five drivers in case you find yourself having gone too deep on structure and clarity.
The first step is bringing trust back to the equation.The world didn’t collapse even though everyone worked from home, and your team will be just fine even if you don’t know exactly how many minutes your staff worked on any given task or how many keystrokes they produce per minute.
In fact, they’ll be far better for it. Leaning in on the flexibility and adaptability of modern ways of working will foster psychological safety and promote engagement and ownership in ways that will have far greater dividends than monitoring and oversight ever could. People are fundamentally reciprocal, and the best way of building trust is to exhibit trust.
One particularly effective method is for managers to focus on setting goals and milestones and giving the team the autonomy to seek out the best way to accomplish them. Tolerating failures and the occasional missteps is critical for making the autonomy feel real, and it goes a long way in making employees feel safe to explore their roles.
Another equally powerful method is to transform stands-ups and check-ins from reporting to supporting events. Recasting regularly scheduled meetings as opportunities for helping team members overcome blockers instead of simply checking on progress made is by far one of the most powerful moves a manager can do to breed trust and self-actualization. Co-location is another practice that is ripe for transformation.
Biting the bullet and going fully flexible might feel risky, but there is no reason to believe that any arbitrary pre-established mix of in-office and at-home days works better than allowing teams to find the norms that work best for them. Trusting your teams to work effectively from wherever they are is the right choice in particular because of how it immediately casts dependability in terms availability and outputs instead of physical presence.
Instead of the default option, the office should be recast as an enticing alternative to which teams naturally gravitate to when they need to share physical spaces for collaboration and team building. Brown bag seminars, in-office baristas, and a few Pelotons can go much further than you think, and putting the emphasis on tangible moments of collaboration is key.
Second, you should ensure that the roles and processes set in place leave space for self-actualization and personalized ownership of one’s work. If you’re using Agile, be cognizant that a 100-meter dash doesn’t come anywhere close to the sense of meaning and impact that running a marathon brings.
Not everyone’s work will be foundational, but everyone’s contributions should feel necessary and acknowledged as contributing to goal deeper than wrapping up a two-week work package.The trick is to make sure that even when working on their own units each employee can visualize a clear pathway from their work to the grand “why” of it all.
This is where the importance of setting goals mentioned earlier becomes particularly clear. The best thing a manager can do when running multiple sprints is to maintain a cohesive narrative of how the work contributes to the larger organizational goal. Often this means distilling vision statements, contractual milestones and even change requests into meaningful arguments about why the work we do today matters.
This may not always be simple to pull off, but who said being a good manager was supposed to be easy? Ultimately, what particular steps you end up taking matter far less than the sincerity of your commitment to making effective teaming a priority for your organization. As for now, it’s more than likely to be pushing back on the overemphasis on structure and clarity.
By Alexander Puutio
Alexander Puutio is an adjunct professor at NYU Stern where he explores the interplay between business leadership and our society at large.
To help you adopt the best approach to an equitable and transparent process in promotions, we asked HR managers and business leaders this question for their best insights. From bringing a marketing approach to internal promotions to developing a clear policy that ensures the process is unbiased, there are many tips that would help you effectively deal with employee promotions in 2023.
Here are 12 tips these leaders shared on how to approach promotions in 2023.
Bring a marketing approach
Employees are discretionary supporters of the organization and fundamental to driving business objectives forward. Rather than promoting them for their tenure or consistency in meeting the requirements of their job, let’s take it up a notch.
Wearing your marketing hat means rewarding employees for their contribution to business growth. Modern Human Resources requires new and better ways of thinking. And as with marketing promotions, we reward our customers for their support and spending, and it is the same with employees. Think of how they may have demonstrated their commitment through one or more of the following examples:
Took on new responsibilities voluntarily
Provided excellence in building custom/client relationships
Recommended other talented colleagues to join the organization
Brought in new revenue streams or built efficiencies into current processes —Jody Ordioni, chief brand officer, Brandemix
Make promotions opportunities for continuous learning
Gone are the days when time in a position or tenure with an organization is the major driver for promoting employees. As employers, we need to ensure we are assessing employee potential, their state of readiness, and the necessary support needed for their success. When considering promoting employees, I want to see employees who see the opportunity as continuous development and are committed to excellence in all areas of performance.
Based on the multitude of challenges we have all experienced in the workplace, employees have made it clear they want learning opportunities that will align with career growth and development. As employers, we need to be sure we are being agile in the promotion process and not constrained by traditional means. —Cecil Hicks, talent development executive
Be clear on what the company is able to offer
As employees climb the corporate ladder, opportunities for promotions are fewer and less frequent. That kind of advancement should not be the keystone for an employee’s career development. Begin by asking, “Why a promotion?” Get insight into their intrinsic motivators and personal goals. This should lead into a useful coaching conversation about ways to grow and expand their career.
Be clear on what the company is able to offer: internal learning and development, company-sponsored learning, professional memberships and conferences, and tuition reimbursement are a few common examples. Work with people leaders to up their game in setting stretch goals and challenging assignments, even within other departments. —Jimmy Rose, VP, employee experience, Cotiviti
Find the overlap between personal and company goals
You tap a high-performing employee on the shoulder and invite them to apply for a promotion or offer them one on the spot. You succumb to the demands of a go-getting employee who’s been angling for a promotion since they joined. Or you lay out a structured career ladder with every hoop an employee has to skip through and the next 30 years of their working life mapped out for them. These typical promotion practices are either unfair or outdated in today’s world of work.
My one top tip for approaching employee promotions in 2023 is to facilitate regular development conversations with every employee. Through these conversations you want to understand an employee’s personal goals and you want to keep them abreast of the company goals. You’re then in a position to craft development and promotion opportunities that work for both the employee and the company—that’s when the magic happens. —Bee Heller, cofounder and managing director, The Pioneers
Promote those who are 70% capable and develop them
A successful strategy is to promote employees that have 70% of the capabilities you are looking for and then put in place a robust development plan to grow the remaining 30%. It’s a win-win for the leader and for the promoted employee, giving them the ability to grow into the role and having their leader as a coach.
In order to identify promotable employees who have 70% of the capabilities for their next role, the leader must engage in regular coaching conversations with the employee to help align the employees own development needs and those skills needed by the functional team to execute the goals and objectives for the year.
This alignment between the company needs and those cited by the employee requires the leader to collaborate with their HRBP and the learning and development department such that both the leader and the employee are fully supported. Using this strategy of promoting those that are 70% ready increases employee engagement scores and drives a learning culture. —Shefali Mody, senior manager, learning and development, iRhythmtech
Create growth opportunities with actionable plans
A promotion is not to be seen as the final destination but as part of a development journey. The development journey to achieve a promotion has to be an exciting discovery exercise for the employee and the leader, to know about what employee’s drivers are, expectations, and career desires. To guide employees in this journey for growth, companies should be open to create routes of development that will trigger an actionable plan.
These routes can be seen in the shape of quick challenges to allow them to demonstrate potential, impactful learning experiences to acquire new and relevant knowledge, accelerator experiences to have a firsthand interaction, and exposure with the desired role and/or a multifunctional project to develop crucial collaboration skills.
Everyday experiences along with planned development interactions offer tremendous learning opportunities; the key is to identify the proper route to support the employee development plan and foster the opportunity for growth. —Elsa Zarate, associate director, development, talent and learning, Clip
Clearly outline employee expectations at every level ahead of reviews
For many companies, the end of the year is performance review time. When an employee approaches leadership to talk about a promotion now, they’re too late! Many organizations have their budgets decided, along with what’s been allocated for salary increases, determined in parallel with the end-of-year review cycle.
Decision makers will want to see individuals demonstrating next-level performance for at least 6 to 12 months before they would determine readiness for that promotion. So I encourage individuals to have the conversation now, get clear on what is expected for that next level, make a plan to get there, and get to work. And don’t forget to schedule time to check in to share your progress and wins. —Claudia Germeshausen, executive coach, A Career For You
Factor in colleague feedback when making decisions
Before making any decisions about promoting employees in 2023, it’s important to look at their colleagues’ feedback. What do those who work with them actually think about them? Furthermore, knowing what you know about your staff members from preemployment testing, how might other employees’ performances be affected; especially when there has been competition for that promotion and some inevitably losing out?
It’s important to promote on the basis of job performance, of course, but never lose sight of the fact that one employee’s promotion has the ability to affect all your other employees. —Linda Scorzo, CEO, Hiring Indicators
Promote those who gain new skills
Upskilling represents the search for knowledge and improvement of skills for professionals and organizations. In times of employees’ shifting priorities and a tight job market, acquiring, retaining, and promoting talents is vital to being competitive. Technology, AI, and others are accessible for most companies, from SMBs to big corporations. All of these make me think that knowledge will be the difference in 2023.
Upskilling will continue to grow, encouraging organizations to promote those who are always bringing and contributing new knowledge to the business. In other words, upskilling should be considered when approaching employee promotions in 2023. —Ricardo von Groll, manager, Talentify
Use promotions to fix hiring problems
Research has shown that job switchers receive bigger salary increases than loyal employees. This creates a poor cycle for companies. Good employees are forced to leave a job they like in order to receive a promotion or a raise. This adds to the recruiting challenges of companies that are already behind on their hiring goals.
A portfolio company to a private equity firm I worked for thought about using a different approach. They looked at using some of their recruiting budget to fund a portion of their early promotions. This would, in turn, help them retain good talent, which would take off some of pressure from their recruiting team. —Atta Tarki, founder, ECA Partners and author of Evidence-Based Recruiting
Use micropromotions for greater impact
Employees want to feel like they are taking regular small steps forward rather than one leap forward every two to three years. These small steps give employees regular bursts of motivation and appreciation for their work. We realized that companies should restructure their promotion strategy to break their promotions into micropromotions.
Employees can receive a micropromotion for milestones, new skills, and increased responsibilities every 8 to 12 months. This strategy doesn’t have a dramatic impact on cost, but it does dramatically improve how an employee perceives their ability to grow within your organization. —Melanie Wertzberger, CEO, Shaka Culture Software
Develop a clear policy to ensure the promotion process is equitable
Diversity and inclusion continues to be a focus in most workplaces, however, strategies end at recruitment. Research shows us that historically marginalized groups tend to stay at the lower level of companies, resulting in low leadership diversity, so it is vital to consistently reinvest in your diverse talent as they grow. Developing your talent is just as crucial as recruiting diverse employees.
Research shows that when marginalized groups are considered for promotion, employers can factor in superfluous details and unconscious biases, which are considered and weighted against them.
Managers should work to focus solely on needed skill set, performance level, and complementary skills when considering promotions so that diverse talent has equal opportunity. Simultaneously, employers can retain talent by setting them up for future success through development initiatives so that they will be completely prepared for a promotion in the future. —Jon Starling, VP, talent development, Integral Ad Science
Promotions took a pause during the pandemic in 2020. The Great Resignation gave employees promotions at other companies in 2021. As 2022 comes to a close amid economic uncertainties in the workplace, promotions in 2023 are taking on a sense of the traditional “promote and develop,” while blending in innovative solutions, such as micropromotions.
The bottom line? Employees need to see growth in themselves and their careers. Use these tips to help guide how your organization approaches promotions in the new year.
Brett Farmiloe is the founder of Terkel, a decentralized Q&A site that connects brands with expert insights.
Holding more cash can be a tactical decision as managers wait for deals.In a volatile year for stocks, equity fund managers are increasingly sticking with cash. Of the 415 U.S. equity funds covered by Morningstar, 63% have increased their cash allocation since the end of last year. In July 2022, equity funds reported their highest average cash level since March 2020, and before that, since February 2016.
Managers may be responding to a volatile market that has sent major stock indexes down 10% or more this year. One of the largest mutual funds has increased its cash stake the quickest. The $220 billion American Funds Growth Fund of America (AGTHX) increased its cash allocation from 3.3% of the portfolio at the end of 2021 to 9.5% as of June 30.
Its current level is its highest since June 2010. Morningstar analyst Stephen Welch writes that the “fund’s cash stake has typically been less than 7% of assets the past five years but has risen to roughly 15% during periods of market stress.” Market uncertainty may be causing managers to keep cash on the side more than before, he says.
The average U.S. equity fund held 2.84% of its portfolio in cash as of July 31, according to Morningstar data, up from 1.29% at the end of 2021. This figure hovered around 1.87% the past five years, most dramatically spiking in March 2020, to 3.08%.
Holding cash can be a benefit when markets are going down, but keeping cash on the sidelines can be a burden on performance when markets are rising unless managers are effective at putting it to work, says Tony Thomas, associate director of equity strategies for Morningstar.
Holding more cash can be a tactical decision as some managers like to wait for good deals, though both redemptions and inflows also can affect a fund’s cash level, Thomas adds. Among funds that held the largest cash stakes at the beginning of the year, year-to-date performance is mixed.
Royce Small-Cap Special Equity (RYSEX) held 15.4% of its portfolio in cash at the start of the year. Its large cash stake seems to have had a positive effect on the fund this year, along with the industrials and communication-services sectors, according to Morningstar Direct. The fund was down only 5.71% year to date through July compared with the average small-value fund’s 7.74% drop.
However, as stocks have rallied the past four weeks, it has lagged and now ranks in the 64th percentile year to date. Managers have continued to put more cash on the sidelines, allocating another 4% of the fund to cash as of June 30. Thomas writes that the “managers will allow cash to build when they can’t find enough ideas that meet their stringent quality and valuation standards.”
For AMG Yacktman (YACKX), it wasn’t the first time the managers turned to cash, but its sizable cash stake of 15.3% hasn’t prevented the fund from dropping 8.5% this year, putting it in the 75th percentile of the large-value Morningstar Category.
In 2020, managers Stephen Yacktman and Jason Subotky executed their “defense to offense” playbook in a steep selloff. “Entering that period with a 25% cash stake helped the fund lose 8 percentage points less than the Russell 1000 Value benchmark through the market’s March 23 trough,” writes Morningstar senior analyst Adam Sabban.
Multiple managers have quickly moved into cash this year. Federated Hermes Kaufmann (KAUFX) increased its cash stake by 7.7 percentage points from the start of the year to 10.8% of the fund. In his analysis of the fund, Thomas writes that “lead managers Hans Utsch and John Ettinger sometimes raise cash in times of uncertainty, but the sector managers might also hold cash if they can’t find the right opportunities.”
The portfolio’s cash stake can fluctuate. “It was as high as 23% in June 2019 but was just 1% in June 2021,” Thomas says. A pair of Fidelity funds went from holding less than 1% in cash to now dedicating more than 5% to cash. Fidelity Mid-Cap Stock (FMCSX) now holds a 6.76% cash allocation, and Fidelity Equity-Income (FEQIX) holds a 5.56% stake.
Amana Growth (AMAGX) upped exposure to cash by 5 percentage points in the first six months of 2022 to put its total stake at 10.52%, one of the largest allocations to cash in the large-growth category. Cash was one of the few sectors to contribute positively to the fund’s year-to-date decline of 16.5%, which still put the fund in the 22nd percentile in the category.
The fund’s cash allocation is still relatively light compared with previous periods. Morningstar senior analyst David Kathman writes, “The portfolio’s cash stake peaked at more than 30% in late 2008 and was one of the reasons it held up so well in that brutal bear market.”
While most school children are educated in academic subjects such as math and English, there are other important life lessons that don’t always make it into the curriculum. Having empathy is a learned skill that comes with listening and understanding others. That’s why Danish schools decided to introduce mandatory empathy classes in 1993, as a way to teach children aged 6-16 how to be kind.
For one hour each week, during “Klassens tid,” students are invited to talk about problems they have been experiencing. During this time, the entire class works together to find a solution. This teaches children to respect the feelings of others without judgement.
The empathy classes are believed to help them strengthen their relationships, sympathize with others’ problems, and even prevent bullying. They also allow each child to be heard, feel valued, and become part of a community.
Naturally, kids grow up to become confident, emotionally intelligent adults and are more likely to raise happier kids themselves. It should therefore come as no surprise that Denmark is consistently ranked highly as one of the happiest places to live. According to the World Happiness Report—released annually since 2012—Denmark is the second-happiest country, after Finland.
The country took first place in 2016 and has remained in the top three ever since. In fact, Denmark was also number one in the very first World Happiness Report in 2012. Clearly, they’re doing something right.
Denmark has consistently been at the top of the UN’s World Happiness Report. In the latest report, Denmark stood in second place followed by Finland. Denmark has been at the top in 2012, 2013, and 2016. Perhaps the empathy classes have a lot to contribute in this aspect.
The Danish Way stated, “Empathy helps build relationships, prevent bullying and succeed at work. It promotes the growth of leaders, entrepreneurs, and managers. ‘Empathic teenagers’ tend to be more successful because they are more oriented towards the goals compared to their more narcissistic peers.” Empathy is also taught through teamwork where those excelling and those lacking are made to work together.
This not only helps with understanding the positive qualities of each other but also lift each other up to complete a task without being pulled down by competition with each other. Another popular program is called the CAT-kit. In this program, the aim is to improve emotional awareness and empathy by focusing on how to articulate experiences, thoughts, feelings, and senses, reported The Atlantic.
There are picture cards of faces, measuring sticks to gauge the intensity of emotions, and pictures of the body, included in the CAT-kit so kids can understand the emotions being exhibited while also learning to conceptualize their own and others’ feelings. In the classroom setting, along with the facilitator, the children are taught not to be judgemental but acknowledge and respect these sentiments.
“A child who is naturally talented in mathematics, without learning to collaborate with their peers, will not go much further. They will need help in other subjects. It is a great lesson to teach children from an early age since no one can go through life alone,” says Jessica Alexander, author of the book The Danish Way of Parenting: What the Happiest People in the World Know About Raising Confident, Capable Kids.
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