2017 was a record year for dividend payouts, but it wasn’t all good news for income investors. Some companies still found themselves having to cut the cash they paid to shareholders, which is painful for those who rely on it.
Take easyJet (EZJ), the low cost airline. Last year it slashed its overall dividend by 24% because of increasing competition and the foreign exchange impact of the weaker pound. easyJet had already trimmed its dividend in 2016, so this was particularly bad news for its weary shareholders.
Dividend cuts are a huge source of frustration for income investors. For that reason many dividend strategies try to root out the risk that a company could be at risk of slashing its payout. Some strategies deliberately avoid very high yields (a tell tale sign that a cut is on the cards). Others look for financial strength, balance sheet health and well managed dividend policies.
Another clue that can help in the search for reliable, growing dividends is to look for companies with a history of uninterrupted dividend growth. Companies that excel against this measure are known as Dividend Achievers.
By consistently upping their payouts year-in and year-out, Dividend Achievers are making a big statement about their confidence in the future. It’s something that Peter Lynch is particularly fond of. In his book, Beating the Street, the one-time star fund manager at Fidelity Investments wrote: “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 to 20 years in a row.”
Very long term dividend growth track records (well beyond just five years) are popular in regions like the United States, where there are larger numbers of companies to choose from. In the UK, these types of stocks are harder to find in numbers – but impressive track records are still out there.
A Dividend Achievers screen modelled by Stockopedia has returned 3% over the past two years (excluding dividends). It looks for companies with a dividend growth streak of at least four years, as well as earnings growth of at least 10% compounded over five years. Here are some of the current qualifiers:
Name Mkt Cap £m Dividend Growth Streak Forecast Yield % DPS Growth % EPS 5y compound growth % 4imprint 519.6 8 3.6 102 30 Somero Enterprises 226.5 5 3 72.1 81.4 Taylor Wimpey 6,306 6 4.4 68.1 35 Walker Greenbank 79.4 8 4 21.1 22.4 Bellway 4,109 8 4 18.8 41.5 Jupiter Fund Management 2,115 7 4.7 16.3 20.6 Brewin Dolphin 1,054 6 4.3 15.4 14.1 Amino Technologies 150.1 6 3.4 10 20.7 Headlam 371.2 8 5.8 10 10.3 Alumasc 49.9 5 5.5 9 53.1 Bovis Homes 1,701 7 5.3 4.1 5.6
Source: Stockopedia Past performance is not a guide to future performance
Blending consistent dividend growth and medium term, double-digit earnings growth picks up a broad range of companies. They range from large cap house builders like Taylor Wimpey (TW.), Bellway (BWY) and Bovis (BVS) to smaller, fast-growth firms like 4imprint (FOUR), Somero Enterprises (SOM), Amino Technologies (AMO) and Headlam (HEAD).
Weathering dividend uncertainty
Dividends are expected to grow by nearly 3.0% overall in 2018, but investors need to consider whether their portfolio companies are capable of keeping pace. Looking for firms with a track record of dividend growth is one way of doing that. General uncertainty in the economy is perhaps the biggest risk to dividend growth across the market this year. But for individual investors looking for small baskets of stocks to explore, there certainly seem to be options available to combine decent expected dividend growth rates and above-average forecast yields.
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