Yet, market complacency has made dividend investing more critical, argues ClearBridge Investments' Ryan Crowther
As investors look to the year ahead for investment opportunities, Franklin Templeton’s ClearBridge Investments’ Ryan Crowther is highlighting why they value the current setup for dividend investing.
Crowther argues that for institutional investors and pension funds, who have to meet “long dated and relatively predictable” benefit obligations, having steady and reliable cash flows is crucial. In this context, dividends can be very useful because they provide a recurring income stream that helps fund those payments, particularly when markets are volatile.
“But dividends are not guaranteed, which is why deep fundamental analysis is critical," explained Crowther, portfolio manager at ClearBridge. "In our process, we focus on characteristics such as secular growth drivers, profit levels that convert into strong free cash flow, disciplined capital allocation decisions, and resilient balance sheets. When these fundamentals are in place, we have more conviction that dividends will prove sustainable over time and will contribute meaningfully to supporting pension payments over the long run."
He believes the best dividends are the result of strong fundamentals, ones that consist of healthy free cash flow, prudent capital allocation, and solid balance sheets. What matters most, he stressed, is whether the dividend policy supports the company’s long-term financial health and outlook.
For Crowther, dividends are most valuable when they “reflect sound capital allocation” and are supported by sustainable, ideally growing, profitability.
While he underscored that dividend investing is not a “one-size-fits-all” label and that definitions differ across managers, “the crux of the dividend portfolios generally would be that you're tending to seek out those companies that have established and sustained dividends over time. For us, that’s a powerful allocation for companies that have maintained dividends over time.”
“It's a signal around capital allocation, it represents generally some stability in terms of cash flows, and it represents some maturity in terms of where the business is at. Once a company reaches a point where it can pledge anywhere from ten to 50 per cent of its free cash flow to a dividend, it has implications about where that company is at in terms of its life cycle or maturity in that. But for us, I think that's where the similarity starts to diverge,” he added.
Yet, he pushes back on the idea that dividends are the main objective, emphasizing that while dividends are a meaningful part of total returns, their real importance lies in what they say about the underlying business, not just the income they provide.
He notes that dividends are “a company’s pledge to return capital,” and that this commitment is inherently uncertain and involves risk.
“Dividend investing for us, is not the central premise of investment,” noted Crowther, adding they’re not simply chasing yield or building a quasi-bond portfolio. Instead, they want a balanced, risk‑adjusted return profile where dividends play a meaningful but not dominant role.
Notably, the ClearBridge team aims for high single-digit returns over time, with more than half of that coming from capital gains rather than income and is comfortable owning names with sub‑1 per cent yields if the growth and valuation case is strong.
“It's all bottom up for us,” he said, while also pointing to how macro has dominated Canadian equities, with the market overwhelmingly influenced by gold and the materials sector finishing the year with more than a 100 per cent return driven by gold names.
For long-held gold positions, that surge now means lower yields and higher multiples, which is why Crowther is constantly weighing valuation against the need to keep “a stable and growing dividend.”
Crowther also sees the US equity story as dominated by the AI boom, but he’s wary of how aggressively it’s being priced. While he underscored the market knows “there's going to be growth,” investors still have little clarity on “what are the economics going to be when the dust settles,” which he suggests could take three to ten years.
To that end, he believes a narrow cluster of mega-cap names like the so-called Magnificent 7 has driven a disproportionate share of returns, which makes valuation discipline critical.
Canada, he argues, has experienced almost the opposite effect. Outside Shopify, which he described as AI-adjacent rather than a pure AI play and not viewed as under direct threat, many consultant-based and software businesses have been hit by fears of disruption and business-model upheaval.
As a result, those fears turned into a source of opportunity later in the year. ClearBridge added Constellation Software to its dividend programs because investors were “emphasizing those concerns around risk,” while his team already had deep familiarity with the company and believed it could benefit from AI tools rather than be undermined by them, he noted.
Crowther believes many of these steadier, more predictable companies have actually been undervalued in recent years as investors chased higher‑growth stories. That’s why he sees the current focus on dividends heading into 2026 as well timed as the segment of the market made up of resilient cash generators is still offering value, even though there are pockets of overvaluation there as well.
Crowther points to certain energy services names in their portfolio as a good example of the setup: these companies offer mid‑single‑digit dividend yields, are reinvesting internally at double‑digit returns on capital and have the potential to grow earnings at high single‑digit or even double‑digit rates. He believes that risk–return profile looks far more compelling than paying a very high multiple for popular AI beneficiaries, especially when both can deliver strong compounding.
For valuation‑driven dividend investors, he thinks there remains a broad opportunity set, and that disciplined stock pickers can still find attractive income-and-growth combinations despite the overall run‑up.
“Since last April, there's been room for the market to become complacent over the course of 2025 and there's been room for valuations to creep higher. Sometimes, that in and of itself becomes a self-fulfilling prophecy. It makes investors feel more comfortable. And I don't think that that should be the case. You should always have your own compass and be thinking about what you own in terms of what's being priced in. It's really hard to predict what could be the catalyst for more volatility, but we know at some point that's coming. We just don't know exactly what it's going to be,” emphasized Crowther.
