Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Terry Smith: family-controlled companies are good for dividends
One of the biggest issues to affect households around the world this year is the reduction in income from dividend-paying investments.
The effects will begin to be noticed in the coming months when many investors find they don’t get as much investment income as they used to, compounded by the fact that many individuals are also having to cope with a reduction in salary if they have been furloughed from their job.
In this week’s edition of Shares we’ve dedicated a lot of space to the topic in an attempt to help readers rejig their portfolios and continue to enjoy healthy levels of investment income.
You can find a list of companies that are still paying their dividends, as well as a deeper analysis into the scale of the dividend cuts and a selection of investment ideas for anyone looking to switch into income-generating funds.
As part of our analysis we noted several comments from experts about how family-controlled companies can be reliable sources of dividends. Among those espousing the virtues of these types of businesses is Terry Smith, manager of popular investment fund Fundsmith Equity (B41YBW7). Writing in the Financial Times in April, Smith said out of 47 stocks in the Stoxx Europe 600 that are ‘family influenced’, only three have cancelled or postponed dividends.
‘Very often these extended families, descended from the business founder, rely on the dividend income from the family business,’ he added.
Family-controlled businesses are often reluctant to take big risks as they want to ensure the company is still around for future generations to run. They are often seen as being very prudent with regards to spending, with the dividend seen as essential as it helps to return a regular stream of cash back to the family.
Sadly having family ties doesn’t make a company immune from the pressures facing the corporate world.
A quick look at the London-listed stocks that have cut or suspended dividends this year unearths four names which all have founding family members as major shareholders and directors.
They are conglomerate Associated British Foods (ABF), drinks manufacturer AG Barr (BAG), flooring group James Halstead (JHD:AIM) and housebuilder Watkin Jones (WJG:AIM). A fifth family company, lift components manufacturer Dewhurst (DWHT:AIM), says it won’t decide on the dividend until June.
One way to continue receiving the same level of income from your investments as before is to sell a small chunk of shares or fund units. This approach tends to divide opinion and we’ll leave the debate for another time.
For now, it would be wise to go through all your investments and check when you normally expect them to pay dividends.
Look at this list on AJ Bell Youinvest’s website to see which companies have cut, delayed or suspended their dividends. Work out the likely drop in income from your portfolio and make a plan for either cutting back spending or deciding if you are happy to sell some of your investments to raise the cash to make up the shortfall.
Also read our investment ideas in this week’s magazine to see if they might be more suitable places for your money going forward.
DISCLAIMER: The author has a personal investment in Fundsmith Equity