I Almost Didn't Buy This 6%+ Yielder Because of Industry Headwinds. Here's Why I'm Glad I Bought It Anyway.

I'm a long-term owner of Franklin Templeton (NYSE: BEN) stock, having bought shares on Jan. 14, 2020. At the time, I vacillated about buying the financial services stock because the company, like other legacy active asset managers, was facing headwinds from the trend of investors shifting their funds into low-cost passive index funds and no-fee brokers.

At the time, the stock paid a dividend of around 6%, but I almost didn't buy. I worried that, amid the COVID-19 pandemic, the company might cut its dividend, which would turn off income-oriented investors and send the stock into a downward spiral.

As it turns out, I needn't have worried. The company, instead of trimming its dividend, just raised it last year by 3.1% to $0.33 per share, the 46th consecutive year it has increased its dividend. Since 2020, the stock's price has risen by more than 37%, and if you count the dividend, the total return is more than 88%.

Here are three reasons why the stock remains a buy.

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Solid financials, low payout ratio

The dividend yield has fallen to 3.81%, but that's mainly due to the stock's price increase. In the third quarter, the company reported revenue of $2.36 billion, up 14% year over year, and earnings per share (EPS) of $0.31, up 109% over the same period a year ago. Assets under management (AUM) were $1.79 trillion, up 11% year over year.

When I bought the stock, its payout ratio was around 38.5%, which is about the same as it is now. That's a safe rate that will allow the company to continue increasing its dividend, and in four years, it will be a Dividend King, one of the stocks that have raised their dividends for 50 or more consecutive years.

To combat fee compression in public equities and fixed income, Franklin has aggressively diversified into private markets and alternative asset classes, such as private debt, real estate, and secondary markets.

It has grown through key acquisitions

Instead of copying other firms by offering more passive exchange-traded funds (ETFs), the company has retained stickier, higher-fee revenue with key acquisitions. The first major one since I bought the stock was its $4.5 billion purchase of Legg Mason in July 2020, expanding its international presence and its multi-asset solutions capabilities, and doubling its AUM.

Franklin Templeton scaled up its alternative investments capabilities with its 2022 purchase of Lexington Partners and Alcentra, a European alternative credit manager. In 2024, the company spent $925 million to buy Putnam Investments, improving its stance in retirement portfolios and complementary investment capabilities in stable value, ultra-short duration, and large-cap value.

The company's focus on customized investing

Through its acquisition of O'Shaughnessy Asset Management in 2022, the company gained Canvas, a direct indexing and tax-advantaged account platform. It also absorbed O'Shaughnessy's quant research capabilities and advisor distribution network.

The acquisition helped Franklin Templeton capture the fast-growing demand for customized, tax-managed portfolios for high-net-worth investors, though it is one of the few advisor-tier platforms that start below $250,000. One of the big draws for investors is that direct indexing makes tax-loss harvesting easier.

Direct indexing is one of the fastest-growing segments in wealth management, and the move allows the company to retain advisory assets that might otherwise migrate toward passive index funds.

Still happy about the choice

There are other investments that would have delivered a higher total return over that period, and, of course, there are plenty that would not have matched what Franklin Templeton has done over nearly six years. However, the best thing about the stock is that it is a stable earner because of its consistent dividend. Those returns can allow investors to invest more in other stocks with higher growth potential, with the comfort of having a dependable, low-volatility stock backing up those investments.

James Halley has positions in Franklin Templeton. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.