dealtn wrote:88V8 wrote:steveal wrote:One of the data points from the AIC site which seems to get little attention is '5 Year Dividend Growth (%pa)'.
Does it not make sense to aim for a more modest initial dividend, which is growing quickly?
I noticed that many of the ITs mentioned in this thread have very low dividend growth rates. MCT, for example, grew at only 0.4% pa over the past 5 years.
Very true.
But taking a random example of a 4% yield growing at 5%, and a 6% yield growing at 1%, it takes twelve years for the tortoise's annual divi to catch the hare's, and
twenty years for the cumulative payout to catch up.
If you're going to start with a low yielder, you'd better be very sure of your growth rate!
V8
Only if you ignored Total Return and solely focussed on dividend income. What might happen to your capital over those 12 years or don't you care?
Well, the remit was to select a basket of ITs with a target yield of 4-5%, without any reference to TR. However, I would suggest that the answer to your question "what might happen to your capital?" if you focus solely on dividend income is surely that it might go up, down or stay roughly the same. If your implication is that a faster growing lower starting yield will lead to greater capital gain then, though it may prove to be more likely, it is far from certain. A few examples from the FTSE 100 over the past ten years:
Unilever - original yield approx 4%, dividend compound annual growth rate (CAGR) about 6%, capital gain 70%.
British American Tobacco - yield approx 4%, CAGR about 5%, capital growth O%
BAE Systems - yield > 5%, CAGR < 3%, capital gain 165%
AstraZeneca - yield approx 6%, CAGR 0.17%, capital gain 270%
Clearly, I have picked these examples to illustrate the point, and it may well be that, more generally, there is a tendency towards outperformance by the lower yielders. However, if a reliable income is one's main requirement, it strikes me that it is easier to find steady dividend payers than to rely on having the ability to pick shortish term "growers". Having said that, I am personally happy to invest in "growthier" shares for the longer term as long as my dividend income requirements have been met.
As always, I think it comes down to individual resources, needs, enthusiasm and expertise. For me, at least, it's not so much a case of not caring about TR, it's simply more about trying to generate a regular and reliable income as the first priority, without having to be particularly concerned about capital fluctuations. A few years in, I am very relaxed about how it is going. If I had been more skilled and adventurous, I'm sure I could have achieved a greater TR but, as long as the strategy appears sustainable (and it seems to be stress tested quite a lot!) then that's of little consequence to me.
Back on topic, I'd find it difficult to stick to just seven or eight, so best not try. TBH, at the risk of being called a heretic, I never really felt there was enough diversification in the B7/B8 portfolios for my liking - I would certainly have looked for less duplication with an IT portfolio that size.