The manager of Merchants Trust (MRCH), Simon Gergel, doesn’t share the widely-held view that dividend growth is more important than dividend yield.

As an example, let’s compare a hypothetical company offering a dividend yield of 8% but no dividend growth with another company offering a 2% dividend yield but growing the payout at 10% each year.

Gergel says it would take 15 years for the dividend payments from the low yield, high dividend growth company to exceed those of the high yielder.

He also argues high yielding stocks have generally outperformed lower yielders, citing a US study covering the 50 years from 1953 to 2003.

At Merchants Trust, Gergel targets stocks yielding at least in line with the market within 18 months.

Recognising that a high yield can be a signal for a dividend cut, yield alone is never seen as sufficient justification for buying a share and Merchants’ investments are not automatically sold if a yield drops below the market level.

HOW HAS THE TRUST PERFORMED?

Gergel’s approach underpins a dividend yield of 4.8% and the trust has a 36-year track record of raising dividends.

A recent addition to the portfolio which underlines the focus on yield is tobacco stock Imperial Brands (IMB). Although admitting to having some reservations about the tobacco industry, Gergel believes these are ‘now in the price’ on a price-to-earnings ratio of 10 and dividend yield of 7%.

He says the company enjoys significant barriers to entry and that tobacco is a resilient product. He sees the business as being well positioned in emerging vaping products.

On a sector basis, Gergel is positive on the opportunities in financial services, aerospace and defence firms and construction and materials, with limited exposure to ‘expensive defensives’. (TS)

Merchants Trust portfolio investment themes

Large core holdings in well financed global, ‘mega’ caps with strong franchises and good yields

Example: GlaxoSmithKline (GSK)

Exposure to emerging market consumer spending growth

Example: Informa (INF)

Inflation ‘tail risk’ – real assets, inflation-linked revenues attractive

Example: Greene King (GNK)

Recovery situations with industries recovering and companies on modest valuations

Example: Bovis Homes (BVS)

Financials for exposure to rising interest rates and volatility

Example: HSBC (HSBA)

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