High Yield vs Dividend Growth

[vand]

Many people prefer the dividend growth strategy - the theory being that companies who continually raise their dividend are healthy and growing businesses, whereas outright high dividend payouts are more mature companies and may even be in decline due to falling shareprice and the market taking a view that the payout is unsustainable.

But is it that simple, and where is the line drawn?

Would you prefer a company paying 8% dividend and still raising it's payouts by a 2%, or a company paying 5% dividend but raising its payouts by 5% annually? In theory if the earnings are constant and the valuations are constant then both should deliver the same return. I suspect many here would prefer the latter as it is seen to be the "healthier" company.

I must admit that in the past I have underappreciated the importance of dividend growth and what it signifies, and how it helps long term returns. Every 1% uplift in dividend signifies to the market that the company that is able to support that 1% higher payout, and all things being equal should be supportive of a 1% higher shareprice - it's not "oh, you are just getting an additional 1% of 5%".

NB, there are exceptions, of course, and some plays that you wouldn't expect to see continually growing dividends - these are companies that deal in debt rather and so their upside is capped (but the should in theory be less risky too - examples HCIL, NCYF, SEQI)


Of course, everyone wants the unicorn - a high and impressively growing dividend! Does it exist?

[Gerry557]

You can get dividend growth from flat dividends by reinvesting. More shares equals more dividends even if its the same level as previous years.

[Lootman]

For me it is dividend growth that matters. If I just wanted a high running yield and little to no growth then I'd buy bonds.

As such the level of dividend does not matter. Many companies that pay low dividends (like Apple, MicroSoft and more recently Google and Facebook) also do large share buybacks which is more tax efficient.

But I guess it depends if you need the income to pay your bills. I don't and if I did then I might consider that I don't have enough invested rather than reach for yield.

[kempiejon]

You can get dividend growth from flat dividends by reinvesting. More shares equals more dividends even if its the same level as previous years.

You can get more dividends by having more shares, you can get more shares by buying them.

In my income portfolio I like to add to it at a yield greater than the portfolio blended yield value.
When picking income shares I check the rate of historical growth of dividends. But it can take a long time for a low dividend high dividend growth share's annual income to match th high yielder and even longer for total income to catch up.

Of course, everyone wants the unicorn - a high and impressively growing dividend! Does it exist?

With FTSE100 at 3.5% today how about
Intermediate Capital Group Dividend Yield - 3.58% with 20% & 15% dividend growth over 5 and 10 years.
Natwest Group 5.3 25% growth over 5 years.
Safestore holdings 3.7% CAGR at 15% odd over 5,10 and 15 years.
Bank of Georgia yields 4.8% but only a few years growth since a stall in 2019 up 25% in 5 years.
4imprint Group was a good prospect 6 months ago 3.5% yield 25% growth.
Not quite as rare as unicorns. Looking at my portfolio I see some other good growers that I picked up on yield spikes like London Stock Exchange, Unilever, Spirax-Sarco Engineering but the above index yields were at decades rare anomalies.

[vand]

You can get dividend growth from flat dividends by reinvesting. More shares equals more dividends even if its the same level as previous years.

The maths on this is correct, but a high & flat dividend can also be seen as a red flag that a company is unable to grow its earnings and dividend payout. Over the long term dividend cuts are likely. See VOD, GSK as perfect examples.

So I think that dividend growth is important as a sign of a healthy company.

Simplistically,
High dividend = cheap valuation
Growing dividend = healthy business

If the company wants to do buybacks with its cash rather than pay dividend that's fine - I consider that equivalent to paying a divi

[Charlottesquare]

Must admit I do get nervous about companies with limited dividend cover, if little dividend cover there tends to be little new investment(without incurring debt) and whilst a company that shells out most of its earnings as dividends is fine in the short term it has to say something about the industry opportunities for investment if the directors can find few investment opportunities and merely distribute all that the company earns.

[Lootman]

Must admit I do get nervous about companies with limited dividend cover, if little dividend cover there tends to be little new investment(without incurring debt) and whilst a company that shells out most of its earnings as dividends is fine in the short term it has to say something about the industry opportunities for investment if the directors can find few investment opportunities and merely distribute all that the company earns.

Agreed although one problem is that UK investors, both individual and institutional, have a rather odd fetish about dividends. They demand high payouts uber alles and can punish a company that resists. You only have to look at the HYP posts here to see how seduced many people are with yield.

Contrast that with US investors who are sanguine about low or no dividends, and gobble up shares of Berkshire Hathaway, Amazon and Nvidia, none of which have ever paid a dividend.

No need to be biased against dividends either. But if you invest for total return then how that is split between growth and income should not matter.

[vand]

You can get dividend growth from flat dividends by reinvesting. More shares equals more dividends even if its

With FTSE100 at 3.5% today how about
Intermediate Capital Group Dividend Yield - 3.58% with 20% & 15% dividend growth over 5 and 10 years.
Natwest Group 5.3 25% growth over 5 years.
Safestore holdings 3.7% CAGR at 15% odd over 5,10 and 15 years.
Bank of Georgia yields 4.8% but only a few years growth since a stall in 2019 up 25% in 5 years.
4imprint Group was a good prospect 6 months ago 3.5% yield 25% growth.
Not quite as rare as unicorns. Looking at my portfolio I see some other good growers that I picked up on yield spikes like London Stock Exchange, Unilever, Spirax-Sarco Engineering but the above index yields were at decades rare anomalies.

My evolving philosophy is that I still want somewhere between 2/3rd to 3/4ths of my portfolio growth to come in the form of the current high yield, with the remaining 1/3rd - 1/4ths coming from the uplift of increasing dividend supported by increased capital value. I still like the HYP strategy, after all.

To me, this looks like 7-8% in current dividends and 2-3% in dividend growth across the whole portfolio.

Over the shorter term, there is also opportunity for higher returns if some of your holdings are rerated, although this will lower the forward dividend yield. That's a nice bonus if it happens, and it gives you the opportunity to recycle the rerated shares into cheaper plays.

[dealtn]

Would you prefer a company paying 8% dividend and still raising it's payouts by a 2%, or a company paying 5% dividend but raising its payouts by 5% annually?

It depends upon its earnings, and the growth in them. Its the £s coming into the company in which I invest that are of interest to me, not the £s the Directors agree to payout.

[IanTHughes]

My evolving philosophy is that I still want somewhere between 2/3rd to 3/4ths of my portfolio growth to come in the form of the current high yield, with the remaining 1/3rd - 1/4ths coming from the uplift of increasing dividend supported by increased capital value. I still like the HYP strategy, after all.

To me, this looks like 7-8% in current dividends and 2-3% in dividend growth across the whole portfolio.

Sorry to disappoint, but receiving a 7-8% dividend on one or more of the portfolio holdings, does not mean any growth has occurred. All that has happened is the cash value of one's portfolio has increased to offset the decrease in Capital value which, all things being equal, will be 7-8% of the holdings in question!

Enjoy!


Ian

[tacpot12]

Must admit I do get nervous about companies with limited dividend cover, if little dividend cover there tends to be little new investment(without incurring debt) and whilst a company that shells out most of its earnings as dividends is fine in the short term it has to say something about the industry opportunities for investment if the directors can find few investment opportunities and merely distribute all that the company earns.

Agreed although one problem is that UK investors, both individual and institutional, have a rather odd fetish about dividends. They demand high payouts uber alles and can punish a company that resists. You only have to look at the HYP posts here to see how seduced many people are with yield.

Contrast that with US investors who are sanguine about low or no dividends, and gobble up shares of Berkshire Hathaway, Amazon and Nvidia, none of which have ever paid a dividend.

No need to be biased against dividends either. But if you invest for total return then how that is split between growth and income should not matter.

I disagree that it is an odd fetish, and I think that US investors have got it wrong. Growth may or may not happen. Once a dividend has been paid, you have the cash.

I do agree that expecting HIGH dividends when the business cannot afford them is wrong - however the Board exists to balance the needs of the business and stakeholders. You can see from the debacle at Thames Water that some boards are still not working correctly in the UK, and perhaps do need to learn something from their US counterparts about resisting satekholder pressure for levels of dividend cover that will hurt the business (and the shareholders) in the long-term.

[Arborbridge]

Must admit I do get nervous about companies with limited dividend cover, if little dividend cover there tends to be little new investment(without incurring debt) and whilst a company that shells out most of its earnings as dividends is fine in the short term it has to say something about the industry opportunities for investment if the directors can find few investment opportunities and merely distribute all that the company earns.

Agreed although one problem is that UK investors, both individual and institutional, have a rather odd fetish about dividends. They demand high payouts uber alles and can punish a company that resists. You only have to look at the HYP posts here to see how seduced many people are with yield.

Contrast that with US investors who are sanguine about low or no dividends, and gobble up shares of Berkshire Hathaway, Amazon and Nvidia, none of which have ever paid a dividend.

No need to be biased against dividends either. But if you invest for total return then how that is split between growth and income should not matter.

There are niche regions in this discussion - eg my own case where on retiring I needed a particular yield to provide the income needed. Maybe not so niche? but anyhow, I was pleased to embrace HYP which gave me around 1% or more yield than similar ITs. My capital investmented has risen over the years, and as people here might know, though my HYP is still the backbone, I have a similar sized portfolio of ITs which give higher growth.

When you get to about 80-ish, dividend growth may not seem so important!

Arb.

[Arborbridge]

You can get dividend growth from flat dividends by reinvesting. More shares equals more dividends even if its the same level as previous years.

That isn't a lot of use if you live on the income from dividends!

[kempiejon]

I was talking to 2 chums over the weekend, I said I'd done all my planning based on a life expectancy of 100. Roughly talking a (historically safe) 4% withdrawal rate and a desire to see the portfolio grow or maintained. Perhaps in the last decades if I'm around not so fussed about portfolio growth it might be needed for care. Then we got a talking to war, pestilence, global population, record temperatures of the oceans, filthy waterways, drought and floods and so on and it seemed more relevant to spend while we have the planet rather than focus portfolio growth.

Shares picked for a growing income strategy, from not necessarily the highest starting yield, can hopefully largely ignore portfolio capital values. I do invest in a global accumulation tracker in lieu of anything else more interesting as I have a bit of flex in my income levels and less interest in portfolio picks just now so that'll boost growth.

[Gerry557]

You can get dividend growth from flat dividends by reinvesting. More shares equals more dividends even if its the same level as previous years.

That isn't a lot of use if you live on the income from dividends!

Neither are investments that don't pay a dividend. Remember you don't have to spend all the dividend you could spend half and reinvest the other half. Equals a growing dividend.

Someone wanting to take a level of dividend will calculate accordingly. Obviously you could buy shares with lower levels of of dividend and let it grow for 30 years and it will effectively become a higher level.

I think up until recently Unilever might have been an example.

[Arborbridge]

That isn't a lot of use if you live on the income from dividends!

Neither are investments that don't pay a dividend. Remember you don't have to spend all the dividend you could spend half and reinvest the other half. Equals a growing dividend.

Someone wanting to take a level of dividend will calculate accordingly. Obviously you could buy shares with lower levels of of dividend and let it grow for 30 years and it will effectively become a higher level.

I think up until recently Unilever might have been an example.

Perhaps I should have used a to show that was tongue in cheek. Clearly there are many ways of killing a pig.

[vand]

That isn't a lot of use if you live on the income from dividends!

Neither are investments that don't pay a dividend. Remember you don't have to spend all the dividend you could spend half and reinvest the other half. Equals a growing dividend.

Someone wanting to take a level of dividend will calculate accordingly. Obviously you could buy shares with lower levels of of dividend and let it grow for 30 years and it will effectively become a higher level.

I think up until recently Unilever might have been an example.

Your example is not growing dividend - it's a growing total return by way of reinvesting some of recieved dividend. A growing dividend is just that - a higher payout per share over time.

It's not just playing with symantecs. With equities its important that the company can demonstrate the ability to grow payouts (as distinct from fixed income) over time, which is implicit in the mandate for the management; if not they risk going backwards and lose out to their competitors.

[vand]

My evolving philosophy is that I still want somewhere between 2/3rd to 3/4ths of my portfolio growth to come in the form of the current high yield, with the remaining 1/3rd - 1/4ths coming from the uplift of increasing dividend supported by increased capital value. I still like the HYP strategy, after all.

To me, this looks like 7-8% in current dividends and 2-3% in dividend growth across the whole portfolio.

Sorry to disappoint, but receiving a 7-8% dividend on one or more of the portfolio holdings, does not mean any growth has occurred. All that has happened is the cash value of one's portfolio has increased to offset the decrease in Capital value which, all things being equal, will be 7-8% of the holdings in question!

Enjoy!


Ian

Over the year the cash with replenish from ongoing business, lifiting the shareprice back up - Enjoy!

[vand]

For me it is dividend growth that matters. If I just wanted a high running yield and little to no growth then I'd buy bonds.

As such the level of dividend does not matter. Many companies that pay low dividends (like Apple, MicroSoft and more recently Google and Facebook) also do large share buybacks which is more tax efficient.

But I guess it depends if you need the income to pay your bills. I don't and if I did then I might consider that I don't have enough invested rather than reach for yield.

I think the absolute level of the starting dividend matters if you look more at the dividend growth - it's not significant if you raise your dividend by 20% a year if you start out on a 1% payout - that more likely just means the company is transitioning from a growth to a more mature phase. But if you start at 5% payout then those sort of increases even after just a few years are very significant and are indicating an established company that is confident that they'll continue to grow strongly.

Good example here is LGEN, who have indicated an aim to grow their dividend by 5% annually from it's already very high 9%ish - is this our high payout/high growth unicorn?

[IanTHughes]

Sorry to disappoint, but receiving a 7-8% dividend on one or more of the portfolio holdings, does not mean any growth has occurred. All that has happened is the cash value of one's portfolio has increased to offset the decrease in Capital value which, all things being equal, will be 7-8% of the holdings in question!

Over the year the cash with replenish from ongoing business, lifiting the shareprice back up - Enjoy!

Complete nonsense I am afraid. If you seriously believe that Yield, in the form of dividends paid away from the company, equals growth. you obviously have no idea how to measure Investment Growth, or indeed Investment Returns generally.

Enjoy!


Ian