The idea of evaluating a share on the basis of whether it pays 2% or 2.5%, how well covered its payout is, and whether the payout ratio is rising or falling is repugnant to many investors. To these thrill seekers, the prospects for turbo-charged growth in earnings, blue skies thinking in the business model (for example Google making driverless cars, drones or space ships), or leverage-fuelled acquisition strategies are much more appealing. Mining, memorably described by Mark Twain as a hole in the ground with a liar at the top, is a particularly popular focus of attention. Spurious cash “shell” companies with vague plans to explore for oil in various lawless, desert hellholes are also popular.
And those areas certainly are more interesting and intellectually stimulating. But, from what I can see, they rarely turn out to be profitable for amateur investors. Seeing the future is already a rare talent, but, when you also need to calculate how much to pay for that slice of that pie-in-the-sky, then the combined skills of Nostradamus and John D. Rockefeller are required to make a successful investment. The share price volatility of high-growth and innovative companies is also disconcerting for many people and often seems to cause ill-timed sell orders. On the other hand, looking for a track record of steady, predictable growth in earnings and dividends, allied with a defensible business model should not be impossible. Why bother looking for new ideas if the old ones still work?
This is why I try to invest in companies that have long track records, defensible business models, and a proven desire to reward shareholders. Although dividends are not the only way to do this, as Warren Buffett and Steve Jobs spent their careers proving, increasing dividends is the most obvious way to reward investors. Dividends, landing in your brokerage account every month, are real and worth much more than the hot air coming from the mouth of some Napoleonic CEO. If not quite jam today, they are at least a bit of butter. You can spend the proceeds, save them, or reinvest them. If a company is increasing its dividend, in a sustainable manner, by more than the rate of inflation every year then it is more than earning its keep in my portfolio. Nothing else is required.
It often seems to be the most boring companies that are actually the best at paying dividends. For example, Capita, on its What we do webpage hardly fires the imagination with its declaration of being “the UK’s leading provider of business process management and integrated professional support service solutions…” However, if you skip to the Dividends page, you get the simple but more interesting “We maintain a progressive dividend policy, a key element of creating shareholder value.” And they have backed this up with actions, paying an increasing dividend for every one of the last twenty years*. Fine words alone won’t butter parsnips, as they say in Belfast.
Of the companies in my portfolio, here is a selection that have paid increasing dividends for many years (in so far as I can obtain the figures from their websites, or elsewhere):
Capita: 20
Glaxo: 20
Novartis: 18
IBM: 18
Roche: 16
Reckitt Benckiser: 11
British American Tobacco: 9
Diageo: 16
Altria: 46 (allowing for the spin-offs of PM and Kraft in 2008 and 2007)
Reynolds: 9
Unilever 14
BAE Systems 9
Sadly, nothing I own seems to qualify for S&P’s gold standard “Dividend Aristocrats” list (this lists the companies that have paid and increased a dividend every year for 25 years). But, give it time and hopefully a few of my companies will eventually make the cut.
* Source: What Investment magazine, Issue 370
Disclosure: Long CPI, GSK, NOVN, ROG, RB., BATS, DGE, MO., RAI, ULVR, BA.
Disclaimer: This post is not a recommendation to either buy or sell. Please consult your investment advisor.