Today’s era of higher interest rates means shares face competition for investors’ hard-earned savings money from the interest on cash and the coupons paid out by bonds. However, the purchasing power of cash is being eroded by inflation, while the coupons investors clip from bonds can only ever be fixed.

‘The beauty of equities and equity income is the growth,’ says Troy Asset Management’s Blake Hutchins, who co-manages the Troy Income & Growth Trust (TGIT) alongside Hugo Ure and is
lead manager on the sister vehicle Trojan Income Fund (BZ6CQ39). ‘When you look at the ability to get perpetuity growth off that dividend coupon, that is what differentiates us.’

Hutchins says equities – and by extension funds that invest in equities – can deliver sustainable growth which puts them at an advantage to cash and bonds. For example, an equity fund that delivers £3.30 for every £100 invested today, so a 3.3% dividend yield, has the potential to increase the annual payment into £3.50, £4 or even £5 annually over the coming years, which a bond cannot do.

RESILIENT INCOME GROWTH

As an asset manager, Troy is known for its cautious investing approach and Hutchins says the company’s emphasis is on resilient income growth from high quality companies.

Troy Income & Growth Trust and Trojan Income do not have the highest dividend yields in the market at 2.8%, yet the fund manager says they could have among the most resilient sources of income. ‘Over time we believe that will translate to better dividend growth than the market and better dividend growth than our peers,’ he explains.

Rather than manufacture dividend growth by chasing high yielding stocks, the fund manager prefers to focus on what he calls dividend compounders. ‘The lower your starting dividend yield, the better your subsequent dividend growth (potential),’ says Hutchins. ‘And the opposite is the case, the higher your starting dividend yield, the less likely that dividend is to be realised and the more perilous that dividend growth is.’

He believes Troy has found a sweet spot with its income portfolios, which balance quality, growth and yield in order to sit around in the 2% to 4% yield range. Over history, that has translated to between 5% and 8% annual dividend growth over the long term.

DIVIDEND ARISTOCRATS

While both Troy Income & Growth Trust and Trojan Income are invested in London-listed large caps such as Unilever (ULVR), Diageo (DGE), RELX (REL) and GSK (GSK), there is the ability to invest overseas.

That explains the presence in their portfolios of names like Procter & Gamble (PG:NYSE), the world’s largest manufacturer and distributor of branded personal care and home care products, payments group Visa (V:NYSE) and payroll services company Paychex (PAYX:NASDAQ), stocks which provide additional dividend diversification for the funds’ investors.

Troy Income & Growth and Trojan Income have stakes in companies with strong dividend growth track records such as Procter & Gamble, the Gillette razors, Pampers nappies and Tide detergent supplier with 65 consecutive years of dividend growth under its belt.

In the FTSE 100, dividend aristocrats include Bunzl (BNZL), the specialist distribution group which has grown its dividend at a 10% compound annual growth rate for 30 years, as well as
Croda (CRDA), the speciality chemicals concern which has also raised its dividend for more than three decades.

Hutchins’ view is that taking dividends from companies is ‘all about capital allocation, and capital allocation is all about people’. So, meeting management teams is something he prioritises. ‘That capital allocation over time is going to make the difference in terms of value creation, but also dividend growth.’

NEW POSITIONS

At the end of last year, Troy Income & Growth and Trojan Income invested in enterprise software provider Sage (SGE) and Hutchins is bullish about the subscription software business’ resilient recurring revenues and high cash generation.

A new position for the two funds this year is pharmaceutical giant Roche (ROG:SWX). The Troy stock picker says Roche has ‘an amazing track record of growth and in developing innovative drugs, which is such a challenge for the pharmaceutical industry’ and sees Roche as a ‘very defensive growth business which has great income characteristics as well’.

Whereas some of the other pharmaceutical companies are much more acquisitive, Hutchins likes the fact that the emphasis at Roche is on ‘internally generated innovation and research and development’.

SLOW GRIND

Risk-averse investor Hutchins says there are plenty of things for investors to worry about at the moment. For instance, companies are going to find generating sales growth more challenging, while maintaining margins will be tough given rising operating costs, and higher corporation tax is another headwind.

‘Buybacks are going to be less prevalent as well,’ he warns, ‘because companies will be hoarding cash and there’s less animal spirits out there, so I am cautious on earnings growth.’

That said, Hutchins says there is plenty of opportunity for resilient, high quality dividend payers to chug along. ‘A cautious outlook doesn’t necessarily mean negative returns. It just means more of a slow grind outlook than the buoyant one we’ve had in recent years post the pandemic.’

‹ Previous2023-04-27Next ›