By Ian Salisbury

Many investors love dividends, which generate income and signal the payer's financial health. But in a market relentlessly focused on growth, it can be hard to find dividend payers that still deliver solid returns.

The $47 billion Columbia Dividend Income fund offers a winning formula, with an average return of 12.9% a year over the past decade, which puts it in the top 15% in its Morningstar category. The fund, overseen by Michael Barclay, with assistance from co-managers Tara Gately and Andrew Wright, targets dividend growers with strong cash flows. It has a portfolio of 81 stocks and annual turnover of just 16%, implying a holding period of more than five years.

There are trade-offs. The fund's dividend yield -- a key consideration for some, is just 1.6%. But that isn't unusual, given the S&P 500's overall yield is an anemic 1.1%. The fund's yield is higher than about two-thirds of the U.S. dividend funds in Morningstar's database.

Barron's recently caught up with Barclay to learn how the fund works and why he likes financial, tech, and healthcare stocks. An edited version of the conversation follows.

Barron's: Columbia Dividend Income has a great record. What is your investing approach?

Michael Barclay: The Columbia dividend income strategy has been in place for 22 years. We are in the large-cap value box. We buy only stocks that pay dividends, and we approach dividend investing from a total-return perspective.

Yield is important -- we know it has been an important part of total return for 90 or 100 years. It is a really important ingredient in terms of minimizing volatility. However, you can't forget about capital appreciation, so before we even think about yield or the dividend policy of a particular company, we dig into the fundamentals to get confident there is strong free cash flow and a strong balance sheet. We seek to find stocks of companies that can grow their dividends, because what really matters to the client is income.

We are looking for 60% to 70% of the total return to come from capital appreciation and 30% to 40% to come from the dividend. But again, it's about growing the dividend. Stocks of companies that can grow their dividends over time are going to provide that higher level of income that will keep up with inflation.

One potential drawback for income investors is the fund's yield, at just 1.6%. Is that an issue for you?

As I said, we're focused on growing the dividend rather than yield for the sake of yield. One thing underappreciated by long-term investors is the yield to cost. If you buy a stock and stay with it for a long time, and the dividend grows, the stated yield might not be high. However, when you compare the income relative to the cost basis, it is pretty compelling.

Right now the fund's biggest sector bet is financials, which represents about 19% of the portfolio. Do you see a lot of value in financials?

We noticed, starting over a decade ago, that these companies -- especially JPMorgan Chase and Bank of America -- had come out of the financial crisis well capitalized with a lot of liquidity. They began investing heavily in digital and mobile capabilities. That has given them a competitive advantage in deposit gathering.

Liquidity is the oxygen for any company, but for banks it's key. Deposits are the lowest-cost source of financing for banks, so that has created a huge competitive advantage.

At the same time, these banks have also been investing in other businesses, such as wealth management, which has helped their returns. JPMorgan and Bank of America, in particular, have created competitive moats that will be tough to undo.

They also have great balance sheets and a lot of capital, and we have been rewarded with nice dividend increases from both. In fact, over the past five years, their dividends have grown at a compounded annual rate of more than 8%.

What other financials do you like?

Morgan Stanley is another good example of a company that has been able to invest in a competitive moat. That started with the acquisition of Smith Barney, which was completed in 2013. Along the way, it bought other companies such as Solium and E*Trade. Those two businesses have bolstered Morgan Stanley's workplace and self-directed investing platforms and helped create a wealth management business that is in many ways second to none.

The wealth management focus has helped dampen the volatility of the company's returns. Morgan Stanley has moved away from the more episodic trading and investment banking, and now wealth management is basically half of earnings. It creates a much more stable revenue and profit stream that, again, has helped the company up its game when it comes to the dividend strategy.

The dividend growth rate is a bit skewed because, in 2021, the company doubled its dividend. But since then, it has been consistent high-single-digit growth.

Tech stocks are about 16% of your portfolio. That is much less than the S&P 500's roughly 36% weighting, but above the 15% tech weighting in the average large value fund. What is the attraction for a dividend fund?

In the dividend space, tech holdings have differentiated us over time -- in particular, our semiconductor holdings. Even before artificial intelligence dominated the headlines, we saw an emerging trend: the proliferation of silicon across the economy.

A good example is Analog Devices, which makes semiconductors found in autos and industrial facilities. The amount of semiconductors in the average auto has gone up dramatically in the past couple of decades. Because of the growth of semiconductors in autos and industrial applications such as manufacturing, Analog Devices has high free-cash-flow margins -- above 30%.

In the past, the semiconductor industry was notoriously volatile. Consolidation in the past 10 to 15 years has made it less so. Another help is Analog Devices' design cycle. If you're designing a chip for an auto, the design process is lengthy. Once you get onto the platform, you're going to be designed into that auto for a number of years. It creates consistency, which is what we deliver: low volatility plus a dividend.

What other tech names do you favor?

Another technology angle we like is picks and shovels -- semiconductor equipment companies KLA and Lam Research. We have owned those for seven or eight years. They got into the portfolio before we even started talking about AI.

KLA started paying a dividend in 2005, and Lam in 2014. They are good examples of companies that have become more consistent dividend growers over time. They have been growing their dividends at a rapid rate. In terms of margins and free cash flow, they are two of the best companies in the business. Both have grown their dividends at a low- to midteens rate over the past five years.

An important part of that growth is consistent service revenue. As the proliferation of silicon continues and more fabs [fabrication plants] are built around the world, their equipment is going into these factories. Importantly, as their install base grows, their service revenue goes up. Lam is really the only company that can service a Lam piece of equipment.

As the install base and revenue grow, margins are increasing. That creates a flywheel of consistent high-margin revenue that supports the dividend and the predictability of the cash flows.

These are companies that got serious about their dividends probably 10 years ago. The dividends don't look high. Neither one yields more than 1%. But the rate of growth has been impressive.

Income is what goes into people's pockets, not yield. That is why owning stocks like these, where the income is growing, is an important part of dividend investing.

There are many dividend payers in healthcare. Which names do you like?

When you think about having defense in the portfolio, pharma performs that role for us. Healthcare spending is going to keep going up, and there will continue to be a need for innovation around new drugs. Large-cap pharma is at the center of that.

Johnson & Johnson is a name we really like. It has one of the last triple-A-rated balance sheets. We are looking for companies that have a diverse offering of drugs and aren't reliant on just one drug that can go off patent. We also look for strong pipelines.

J&J's blockbuster autoimmune drug Stelara lost its patent exclusivity in 2023. But that's behind the company, and it has a nice group of drugs now that give it a diversified profile with a strong pipeline. Increasingly, we think J&J's pharma business can grow by double digits through the end of the decade. This is the type of name that will protect you in a stressed market.

AstraZeneca is a new name we purchased last fall. Again, the company has a free-cash-flow margin above 20% and a strong balance sheet. It has a diverse drug portfolio without a lot of patent-cliff expiration, and a strong pipeline.

Large pharma is an area where AI can help companies not only be more productive, but also help in the drug-approval process. It can help companies increase the success rate when they are conducting clinical trials by helping them design better studies and gather and analyze data more efficiently. Pharma companies have been thinking for many years about how AI can improve their business.

What is one stock you bought recently that you are excited about?

We bought Altria around February-March 2025, when we were doing work around the potential impact of tariffs. Altria screened as being relatively well insulated against tariffs, and it pays a dividend. The stock yields just under 6%.

Altria is doing a good job of transitioning away from traditional cigarettes and toward smokeless solutions and nicotine pouches. We believe that is an avenue of growth.

The dividend grows somewhat modestly, by about 4% a year. But there is growth because the company is generating strong free cash flow. We are excited about Altria.

Thanks, Michael.

Write to Ian Salisbury at ian.salisbury@barrons.com

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