Interest rates are expected to stay higher for longer to combat the sticky inflation which remains a threat to investors’ hard-earned wealth and purchasing power. During periods of high inflation, it is crucial to invest in companies that possess pricing power, because these firms can pass on increased costs to customers, enabling them to maintain profit margins and generate the robust cash flows that support a reliable and rising dividend to shareholders.
Dividend income has long been known as a powerful tool for compounding wealth. No less a figure than John D. Rockefeller once said: ‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’
And as Ben Lofthouse, head of global equity income at Janus Henderson, explains: ‘The growing dividend streams from equities are one of the best ways to protect investors’ income from the ravages of inflation over the long term. That only holds true though if the companies are committed to sharing their growth with investors, and paying and growing dividends (it doesn’t work if a company is a “fair weather” payer). A long track record of dividends suggests that a company is committed to sharing their success with investors and, perhaps just as importantly, has a business that can stand the test of time and economic cycles.’
ARISTOCRATS & KINGS
A useful starting point for spotting companies with pricing power is to look for those with a track record of consistent earnings growth and shareholder distributions, many of which are found among the so-called ‘dividend aristocrats’, firms that have consistently raised their dividends for at least 25 years.
The US dividend aristocrats are a select group of S&P 500 index-listed corporations that have raised the shareholder reward for a quarter of a century or more. As of 28 March 2024, there were 67 constituents in the S&P 500 Dividend Aristocrats index with top 10 constituents by index weight including construction equipment giant Caterpillar (CAT:NYSE), discount retailer Target (TGT:NYSE), engineering services stalwart Emerson Electric (EMR:NYSE) and food processor-to-commodities trader Archer-Daniels-Midland (ADM:NYSE).
Other aristocrats include retail behemoth Walmart (WMT:NYSE), energy giant Chevron (CVX:NYSE) and drinks colossus Coca-Cola (KO:NYSE), not to mention industrial and healthcare company 3M (MMM:NYSE) and fast food chain McDonald’s (MCD:NYSE).
An even more elite group are the ‘dividend kings’, ultra-rare stalwarts of the dividend scene that have raised the shareholder reward for at least 50 years, although many of these kings are mature businesses generating pedestrian growth. Their number includes American States Water (AWR:NYSE) and Dover Corp (DOV:NYSE), which have each hiked dividends for pushing on 70 successive years, as well as consumer goods Goliath Procter & Gamble (PG:NYSE) and motion and control technologies specialist Parker Hannafin (PH:NYSE) on 67 years of growth apiece, and the aforementioned Walmart and Coke, which have increased the dividend for at least half a century. That’s no mean feat when you consider the period spanned multiple recessions, the bursting of the dot.com bubble, the Great Financial Crisis and the Covid pandemic.
ADP A high-quality aristocrat
Investment trust STS Global Income & Growth (STS) has owned dividend aristocrat ADP (ADP:NASDAQ) for several years. This high-quality software business provides outsourced human capital management services to businesses including payroll, tax, employee benefits and insurance.
STS Global Income & Growth’s manager James Harries says: ‘The impetus to outsource these functions grows as complexity increases giving a long runway for growth. As a company with limited capital requirements and high returns on capital, ADP can both invest sensibly in the business to fund innovation and entrench their competitive advantages, as well as pay a growing dividend. The shares have delivered an excellent return balanced between income and capital growth and currently yield 2.3% on a prospective basis.’
Lofthouse points out that Microsoft (MSFT:NASDAQ) has become a dividend aristocrat over the last decade. ‘The yield is low after the current rally, but it could be one for investors to think about. Microsoft is well positioned to benefit from the investments it has made in cloud computing and AI (artificial intelligence). Coca-Cola has a higher yield and a long track record of dividend growth, too. The company has been focused on making itself less capital intensive whilst broadening out its product offering.’
Luc Plouvier, senior portfolio at Van Lanschot Kempen, highlights the attractions of another drinks name, alcoholic beverages company Diageo (DGE). ‘It has a broad range of world-famous brands like Smirnoff vodka, Captain Morgan rum, Johnnie Walker whisky, Baileys Irish cream, and Tanqueray gin and sells its products in more than 180 countries. The business has high profit margins, high returns on invested capital, and a strong balance sheet. Over the past two decades, Diageo has been able to grow 4% to 6% per annum, in line with the global spirits market. Because there are no substantial reinvestment needs, Diageo pays out a predictable and growing dividend. It complements these dividends by buying back their shares in the open market.’
US DIVIDENDS FOR UK INVESTORS
Most US shares can be held in a dealing account, ISA or SIPP (self-invested personal pension). For any account except a SIPP, you will need to complete a W-8BEN form to be able to invest in a US share. The form can typically be completed online. Tax treaty arrangements between the US and UK mean that the usual 30% withholding tax on US dividends is halved to 15% for investments in a dealing account or ISA once a W-8BEN form is completed.
A W-8BEN form is not required for US investments held within a SIPP as the relevant US authority, the IRS, recognises SIPPs as a qualifying pension scheme and all qualifying US dividends and interest are automatically paid free of any withholding tax.
TAP INTO DIVIDEND MACHINES
A fervent fan of dividend growth investing is legendary US fund manager Peter Lynch. In his book ‘Beating the Street’, Lynch remarks that ‘the dividend is such an important factor in the success of many stocks that you could hardly go wrong by making an entire portfolio of companies that have raised their dividends for 10 or 20 years in a row.’
Taking our cue from the feted American investor, Shares has used Stockopedia to screen for dividend champions across the UK, US and European markets that have grown their dividends in at least nine of the last 10 years, which captures companies that may have undergone the briefest of Covid-induced dividend-paying hiatuses. We outline our best ideas below plus a tracker which offers exposure to a diversified list of regular dividend hikers.
CLAVERHOUSE One to consider
Kepler Partners analyst Ryan Lightfoot-Aminoff points out that investment trusts are well suited to becoming dividend aristocrats due to their ability to hold back some revenue each year to support dividends in more challenging periods. ‘This was particularly beneficial during the covid pandemic when, although dividends were slashed, numerous trusts were able to fall back on their reserves to maintain payouts,’ says Lightfoot-Aminoff, who believes JPMorgan Claverhouse (JCH) is worth highlighting ‘as an example of a great dividend track record, having recently achieved its 50-year milestone of growing its dividends. More impressively, the annualised dividend growth of 8.8% has beaten both UK inflation of 4.9% per annum and the market’s dividend growth of 6% per annum since 1972. Managers William Meadon and Callum Abbot are fundamental stock pickers, but are always mindful of risks, adopting a barbell approach to building the portfolio. The trust’s historic yield is circa 5%, though the board has indicated it will raise interim dividends by 3% over 2023 levels. JPMorgan Claverhouse has steadily built revenue reserves to support the dividend in leaner times, with over 73% of 2023’s dividend in reserve to support growth going forward. As such, we believe the attractive, inflation-busting dividend is well supported and should appeal to investors.’
For investors prepared to set aside any environmental concerns, US oil firm ExxonMobil (XOM:NYSE) is an excellent source of shareholder rewards. Since 2019, the company estimates it has added $10 billion to annual earnings and cash flow at an oil price of $60 per barrel and the plan is to increase this by a further $14 billion from the end of 2023 through to the end of 2027. This has been achieved through operational efficiencies and a disciplined approach to capital investment. Global oil prices have consistently tracked higher than $60 over the last three years and the company’s copious cash generation has supported a stream of share buybacks and dividends. Based on consensus forecasts, Exxon offers a 2024 dividend yield of 3.2%. US firms like Exxon have faced less pressure than their European counterparts to invest in areas like renewables but the company has still put money into what it describes as ‘lower-emissions opportunities’ and plans to allocate $20 billion to these areas by the end of 2027. However, instead of wind and solar, Exxon is prioritising areas which it perceives as a better fit for its skillset like lithium, hydrogen, biofuels and carbon capture and storage. [TS]
Nestle (NESN:SWX) has built a strong track record of consistent dividend growth stretching back 35 years. Since 1995 this global consumer defensive giant has never failed to increase its annual dividend which has grown at a compound annual growth rate of 9% a year. Given the company’s strong balance sheet and high returns on capital, the prospects for the historical trend to continue looks reasonably assured. Nestle has assembled a very diversified stable of global brands from Kit-Kat, Milkybar and Perrier water to Maggi soups and Purina pet food. Growing the business organically is a key part of Nestle’s strategic focus. The company targets mid-single digit organic sales growth based on investment in categories and regions with attractive long term growth trends. In addition, Nestle has a focus on increasing the contribution from premium brands to drive margin expansion and accelerate growth. Another leg of the strategy is to deliver a quarter of sales from e-commerce by 2025. Nestle spent two-thirds of its media budget on digital campaigns and acquired 308 million first-party data records in 2023. The company says applying artificial intelligence to the dataset helps its brands reach target audiences more efficiently. UK holders of Swiss stocks are subject to a 35% dividend withholding tax but this can be reduced to 15% by filling out the relevant paper work. [MG]
Cranswick (CWK)
Share price: £40.95
Dividend yield (source: Stockopedia): 2.1%
Meat and poultry producer Cranswick (CWK) isn’t an obvious candidate for a feature on dividend growers, yet the Kingston upon Hull-based company has increased its payout every year for more than three decades which seems an extraordinary achievement for such an unglamorous business. Formed in the early 1970s by farmers in East Yorkshire to produce animal feed, today the company supplies a range of high-quality, predominantly fresh food, including fresh pork, poultry, convenience and gourmet products to most major supermarket and caterers. Using data going back to the early 1990s, we estimate Cranswick has compounded earnings at more than 11% per year with remarkable consistency which would explain its ability to increase the dividend. It has achieved this by constantly innovating and adding value for its customers, both investing in its own operations and via acquisitions, meaning it can pass through price rises to offset rising input costs and protect its margins and cash-flow.
Analysts seem to continually underestimate the firm’s natural growth rate, as it regularly beats consensus forecasts resulting in upgrades and a constantly rising share price. Its latest venture, supplying pet food to Pets at Home (PETS), is in its early days but we have little doubt that too will prove a winner in time. [IC]
SPDR S&P Global Dividend Aristocrats UCITS ETF (GBDV)
Share price: £24.00
Income-hungry investors seeking low-cost passive exposure to the theme should consider SPDR S&P Global Dividend Aristocrats (GBDV), an ETF (exchange-traded fund) with low ongoing charges of 0.45% which has delivered solid annualised total returns of 6.4% over the past decade. The fund physically replicates the S&P Global Dividend Aristocrats index, which tracks high dividend yielding shares globally. The index is designed to measure the performance of high-dividend-yielding companies that have increased or maintained dividends for at least 10 successive years and also have positive cash flow from operations and a positive (ROE) return on equity. Diversified across 99 cash generative businesses with an average market cap of 20.5 billion, the ETF offers an attractive 4.1% dividend yield and exposure to reliably income-yielding sectors including financials, utilities and real estate. Top 10 positions include US-listed REIT (real estate investment trust) Highwoods Properties (HIW:NYSE) and Belgian multinational chemical company Solvay (SOLB:EBR), as well as cash generative US telecommunications conglomerate Verizon (VZ:NYSE) and Getty Realty (GTY:NYSE), a REIT specialising in convenience and automotive retail property.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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