Dividend achievers reward investors
A combination of weak manufacturing data and the fact that shares in two widely-held companies, Vodafone and M&S, went ex-dividend this morning caused the FTSE to fall earlier today.
Both companies form an integral part of many a share portfolio and remain the cornerstone of a sizeable number of pension funds too, ostensibly thanks to their reliability when it comes to dividend distribution.
The term “Dividend Achievers” has become more widespread in investment circles in recent years and so caught the attention of investors anxious to avoid putting their capital at risk. It describes organisations that have increased their dividend payout each year for the last ten or more consecutive years.
The UK is home to a number of solid, high-quality, high-yielding companies and their shares. Indeed, during the past 12 months, even though 107 quoted UK businesses either cut or scrapped dividends altogether, no fewer than 342 enterprises increased or reinstated their dividends.
According to the latest Dividend Monitor published by Capita Registrars, sterling-denominated dividends paid by listed companies rose by 10.3% in the first quarter of 2011 to a staggering £15 billion. Capita forecast full-year returns of £64.2 billion; this would represent the fastest dividend growth since 2008 – taking place during the most challenging macroeconomic climate seen in the UK since World War II.
It follows that dividends are of huge importance - not only to their ‘traditional’ fans, ie income-seeking investors, but also to those who increasingly appreciate the wonders of compound interest.
In general, companies distributing regular dividends tend to be in better financial shape and so produce sustained earnings and revenue growth, boosting share prices over the longer term. Moreover, those organisations confident enough to increase their annual dividend payouts tend also to raise their levels of expected operational performance.
Last year, Indxis, a company with an impressive record in the US of creating indices of leading companies capable of generating rising dividend returns to investors, launched the UK Dividend Achievers Index. In the 12 months to 31 January, it produced an annualised return of 20.85%, out-performing its MSCI benchmark by 2.96%.
The index currently includes names such as Vodafone and BAE Systems amongst its top 10 dividend yielding companies (they’re returning 5.6% and 5.7% respectively), hardly a huge surprise to investors. However, the presence of video game retailer Game Group might cause a few eyebrows to be raised. The group boasts an 8.3% dividend yield, but this impressive-looking return serves to highlight the potential folly of investing solely for the dividend.
Longer-term investors should avoid making a high yield their only investment criteria and opt instead for less eye-catching, but invariably safer, stocks that offer a greater likelihood of annual dividend increases. In Game Group’s case, some investors may consider the juicy-looking dividend a form of compensation issued by a company that faces weakening consumer confidence and increased competition.
Furthermore, it goes without saying that investors should avoid putting all of their eggs in one basket.
As the BP crisis proved last year, even the largest organisations can experience a completely unforeseen ‘black swan’ moment which, in BP’s case, resulted in a rock-solid-looking dividend being suspended, much to the chagrin of investors, many of whom were far too reliant on the company’s payouts.
There’s another potential problem with impressive-looking yields: a company’s management can be tempted to manipulate the dividend in order to create a favourable picture of future cash flow. Investors buying shares with unusually high yields and deteriorating fundamentals are asking for trouble because such dividends are likely to be either sliced or scrapped altogether. Similarly, companies paying dividends from the proceeds of newly-issued equity rather than free cash flow are invariably throwing off misleading signals to investors.
As I write, Vodafone is down 5.6p while M&S has dropped by 8p. In effect, assuming their longer term dividend plans are unaffected, this means the gross yield on both has temporarily leapt by 3% and 2% respectively – enough, I suspect, for some shrewdies to take immediate advantage.
posted on 01 June 2011 13:25 byPJS
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