"There has been a notable return among market strategists and in the media toward time-tested classic approaches of investing. Among the foremost elements of classic investing is the demand for dividends."

• Comments from Lowell Miller on the Dividend Stability of the Portfolio (10:34)

• Comments from Lowell Miller on Recent Weakness in the Utilities Sector (1:45)

Transcript of call:

Hi. Good Morning. Thanks for joining us. Obviously these are unusual times and while an integral part of our approach involves high-yield with dividend growth, right now the safety of the existing yield is of paramount importance. We are getting dividend growth, but we are doing a lot more work on ensuring the safety of the dividend yield. What unusual times really means is that companies that had a normal course of business in the past would be good credits and would roll over their financing when financing was due - this is a big question mark today. Other question marks include the revenue sources, etc.

So our analysis has become much more intensively focused on the balance sheets than ever before. We always paid attention to it, but it never really had the import for any company, whether financial or utility, than it has today. So we have sort of a list of points - that are kind of our checklist - which we are going through. The first is, really the business concept, and basically this is a focus today on companies with recurring revenues. It has always been our focus, but even more so than it ever was and we really - at this point in time - we are really not prepared to take on any kind of cyclical exposure. That may happen later, but not right now.

We want companies that have made a verbal commitment to dividends; that have demonstrated their verbal commitment by not only paying them but reaffirming them and also growing them. So first is the concept. Is it the kind of company that can share prosperity and earnings and cash flow with investors? Is it a company that is committed to doing so? And does it have the ability? This goes back again to cash flow, recurring dividends, recurring streams of income, from which it can pay dividends. It also needs - in order to pay dividends - it needs the ability to cover costs. So we're looking at - for minimal financial strength an interest coverage ratio of 2 to 1 and that would really only be for the most reliable recurring kinds cash flow stream such as utilities or those kinds of business that are at the top of the food chain for recurrence. But, generally, we would prefer to see at least a 4 or 5 to 1 coverage of interest, so that we can be sure that there is basically money left over for us as shareholders. We want to know also about other demands on dividend cash - and here in the current environment the other demands on what would otherwise be dividend cash is the desire or need of companies to horde cash on the possibility that they will have to do new financing on their financials, or the possibility that the financing would be hard to get or expensive if they are other kinds of companies. So that the primary demand on what would otherwise be dividend cash. So there again, it's a matter of not only analyzing the earning stream and operational business which itself is stressed, but also analyzing the balance sheet.

It tends to be that utilities would not be stressed at up to about roughly 50 percent debt in their capital structure. With other companies we are looking for much less if not none - 20 to 30 percent debt or none. There is also a spirit abroad in which it has become more permissible for companies to cut or reduce their dividends in the interest of hording or the interest of safety, so that if a company is an a business where other companies have been reducing their dividends, even if this company might not need to, they may feel that there is an extra measure of safety or an extra measure of security in doing so. And the REITS are a perfect example, there are plenty of REITS that are coming in with fine funds from operations and operating income as well, but across the board in the REITSs space companies are deciding to pay stock instead of cash and this is really not adequate.

We have used companies with stock dividends in the past and it's not necessarily a bad thing depending on how it's coming to the investor, but when they switch from cash to stock it's really just dilutive. So when we find ourselves looking at REITs - and just being very leery of a kind of prophylactic decision on their part to go with a stock dividend rather than a cash dividend, which we would not want, even though there are quite a number of specialty REITs which have not as yet, any how, had any kind of a dent in their cash flow. We are very leery of companies that emphasis how much liquidity they have or how big their revolvers are - we want to say that in this case bigger is not better. And the last time we heard these kinds of phrases about how much liquidity we have or how big our revolver is was on the verge of the tech crash. Probably most of you will remember all the tech companies coming out and saying what great access they had to liquidity, which is basically saying we've got a lot of room on our credit card - and to us, that's not really sound business.

We also need today to analyze customers much more than before - customers of businesses. First of all, they have to able to pay. Frequently, they have to be able to get credit in order to pay. So not only are businesses the issue, but what about the customers of the businesses? This is a kind of analysis that really was not that important in the past. You just assumed that a business that had customers with, say, big ticket items, for example, that needed to finance them - well if they made the sale, they get the financing and they make the payments. It's really not the same any more. That's another issue that we're looking at.

Some additional issues include the impact of government programs - obviously, various kinds of support for stimulus. All this is extremely important. For example, banks that take TARP can't raise their dividends without permission and most of them have either caught or it seems that they are being pressured to cut their dividends, which makes sense, because otherwise they are just taking taxpayer money and putting it out as dividends. It really not appropriate, in our view.

There are other kinds of things going on that could affect a company's ability to pay such as the price trends of commodities, consumer shifts, are they using more generics rather than branded products. Basically we're looking at anything that can affect revenues because that's what pays the dividends. A few companies have cash hordes from past prosperity, but we are really not that interested in being paid from accumulated assets. We really want to be paid from current cash flow.

Basically, to summarize, unless there are special circumstances, and there are some stocks that have special circumstances, we want the company to have low debt, easy ability to service the debt, easy ability to refinance, customers that don't need to finance or customers that can do so easily, for example, if their customer is the government, high level of recurring revenues, cash flow that amply covers interest and all other kinds of fixed expenses, as well as the dividends, a verbal and an active commitment to dividends from the company. A recent dividend increase gets a big star - and it always got a star on our system, but it gets a much bigger star than ever before because these are really the companies that can afford it and have made the commitment, and we think are going to be the durable investments going forward in an environment which may be rather soft for years. That's kind of our essential look at this.

Just one other thing that I would like to touch upon is the underlying importance in our strategy of continuing high yield and the ability of investors to spend the yield, if they need it, but in a way, even more important, the ability of investors to take that yield and reinvest it. There has been a lot of material in the press and from strategist from various warehouse firms showing that really over the long term there is not that much gain from stocks - at least stocks represented by large cap industries - that the real gains over the long term come from dividends and the reinvestment dividends - as you add more and more shares from the cash flow. I know it's not that easy to take a long term view right now when it seems like the sky is falling, but this really still needs to be - I think the philosophical core of investing. And this is the prime time where this cash flow from dividends can be reinvested in stocks at low prices. The dividend cash flow is kind of an automatic dollar cost averaging process. You don't necessarily see it in your returns each week, and you don't necessarily even see the better dividend paying stocks lead the market, each week or each month or each quarter, but over the long-term is sort of an inexorable process and I think it's important not to loose sight of it.