Hunting for dividends in the Goldilocks zone

It goes without saying that dividend investors want a reasonable yield, but what is reasonable? 

Some investors are happy with yields of 2% or less because they believe high growth tomorrow will more than compensate for a low yield today. But for investors who want a decent income today, 2% is unlikely to be enough for all but the most wealthy.

At the other end of the scale, some investors will only invest in high yield opportunities, aiming for something close to and preferably above a double-digit yield. At first glance this seems like a no-brainer, but don’t forget that dividends are not guaranteed and promises of double-digit yields are often followed by the reality of dividend cuts and suspensions.

For most dividend investors then, looking for shares where the dividend yield is in the Goldilocks zone (not too high and not too low) is sensible. Of course, what is too high or too low is subjective, but I think something in the range of 4% to 8% is a good starting point.

So in this month’s Master Investor magazine, I decided to focus on a couple of FTSE All-Share companies, both of which have more than ten years of unbroken dividend payments and a starting dividend yield north of 4%.

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Hunting for sustainable dividend growth

I write the regular Dividend Hunter column for Master Investor magazine, and in the February issue I wrote about sustainable dividend growth and how to identify it.

In almost all cases, long-term dividend growth is unsustainable without earnings growth, earnings growth is unsustainable without revenue growth and revenue growth is unsustainable without capital employed growth.

In practice, this means companies can only produce long-term sustainable growth if they employ more capital to fund more factories, warehouses, vehicles, machines, robots, offices, computers and an endless array of other capital assets.

Or to put it another way, if you’re looking for sustainable dividend growth, you should start by looking for sustainable capital employed growth…

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Marks & Spencer: The destroyer of shareholder value

I like Marks & Spencer. No really, I do.

I used to buy most of my clothes from M&S back in the late 1980s and early 1990s, when I was in my late teens and early 20’s. The clothes were well made, the designs were mainstream and the consistency of quality and sizing was second to none (at least in my local high street). 

But that was a very long time ago and since then M&S has lurched from crisis to crisis, carrying out what seems to be an endless transformation project to “make M&S special again”.

This endless transformation has been incredibly expensive. For example, over the last 20 years M&S has retained about £2.5 billion of shareholders’ earnings to invest in the existing business, to make acquisitions, to buy back shares and so on. And yet, after all that hard work and investment of cold hard (shareholders’) cash, the company’s share price is lower today than it was 20 years ago. 

For most shareholders then, M&S has been a disaster for at least two decades.

So in my latest article for Master Investor magazine, I wanted to outline two red flags which, for many years, have suggested M&S was a no-go zone for long-term investors.

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My worst investment ever

Okay, so this isn’t actually my worst investment ever (I managed to invest in Yellow Pages provider Yell before it went bust in 2013), but it’s pretty close.

The company in question is called Xaar.

It’s a small-cap “disruptive” technology company, and that immediately puts it somewhat outside my usual hunting ground of long-established FTSE 350 dividend payers.

Since I invested in 2018, Xaar has had an existential crisis which resulted in the dividend being suspended and its shares are currently down by about 85% from where I bought them.

This is not good and several years ago I would have sold the company almost as soon as it suspended its dividend.

However, I think that’s an overly simplistic knee-jerk reaction, and that’s something I generally try to avoid.

That’s why, rather than sell immediately, I decided to spend a fair bit of time re-reviewing Xaar from the ground up. I wanted to know: 1) how much of this loss was down to bad luck, 2) how much was down to a bad investment process and 3) how much was down to a bad analyst (i.e. me).

You can read about my Xaar blunder, what I’ve done to fix the root causes and what I intend to do with the shares in a recent article I wrote for Master Investor magazine ( linked below).

In summary though, it’s a bit of all three.

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Woodford’s closure, FTSE 100 valuations and The Property Chronicle

Unfortunately for his investors, Neil Woodford’s flagship fund is to be closed in the new year.

(Update: The entire Woodford empire is now closing down)

This is obviously terrible news as a lot of people could lose a lot of money.

I don’t want to trivialise this by jumping on the news-cycle bandwagon, although I guess that’s how this is going to look.

I saw a lot of “lessons from Woodford” articles across my news feed this morning, so I though I would apply the Tesco philosophy of “every little helps”, and re-publish an article I wrote a few weeks ago.

I wrote it for a new magazine called The Property Chronicle, published by those nice people at Harriman House (who also, not entirely uncoincidentally, publish my book).

Reading back through the article, I think two lessons are paramount (one of which I forgot to mention):

  1. Don’t borrow short and lend long (or in this case, don’t invest cash into assets that could take months to sell if you might need the cash back at short notice)
  2. Diversify, diversify, diversify (even if that means holding several funds which are themselves diversified)
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The hidden debt of lease obligations

Unless you’re an accountant or an experienced and well-read investor, chances are you either haven’t heard of capitalising lease obligations or, if you have, it’s something you don’t do because it can be a lot of work.

Until recently I fell into the second group. I knew what lease capitalisation was (don’t worry if you don’t; I shall explain all shortly) but I didn’t do it because a) none of my investments had problems with crippling lease obligations and b) it was a lot of work.

However, the argument (or excuse) that it’s all too much work is about to become null and void, thanks to a new accounting standard known as IFRS 16: Leases.

This new standard is about to shine a great deal of sunlight onto what was previously a dark and largely hidden debt, so now seemed like a good time to review the basics of lease obligations and how much of what is generally a good thing can be too much.

After much pondering, frowning and chin-scratching I came to the (long overdue) conclusion that lease obligations are basically the same as debt obligations.

You can learn a bit about lease obligations and how I’m going to factor them into my investment process in this month’s Master Investor magazine (below).

I’ve also included Burberry, The Restaurant Group, Next (all of which I own) and Marks & Spencer (which I don’t own) as examples of how the hidden debt of lease obligations can seriously distort the accounts of retailers and other property-based businesses.

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Mitie disappointment or Mitie dividend potential?

Mitie Group is the UK’s largest facilities management (FM) company and it joined my personal portfolio and the UK Value Investor model portfolio way back in 2011.

In layman’s terms, Mitie provides corporate and government clients with outsourced services (mostly property-related such as maintenance, security and cleaning) so that its clients can focus on their core activities rather than non-core activities like fixing a boiler or cutting the grass.

When I bought Mitie in 2011, it had a long track record of impressive and steady growth, and that’s largely why I invested (my investment criteria are now much more demanding).

But that was then and this is now, and over the last few years, Mitie and other large diversified outsourcing conglomerates (notably Capita and Carillion) have run into all sorts of problems.

Mitie began its turnaround journey in 2017 with a dividend cut from 12p to 4p, and that’s where the dividend remains today.

That turnaround process is now largely complete, so the next few years will be the litmus test as to whether all the hard work restructuring the business has been worthwhile, and whether the dividend can be increased back to previous levels and beyond.

Personally, I’m mildly optimistic, and I’ve outlined why at some length in this month’s Master Investor magazine.

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Stagecoach: Is the bumpy ride finally over?

Stagecoach Group ( is the UK’s leading bus and coach operator with a rail franchise business on the side.

As a dividend-focused investor, I find Stagecoach an interesting company because it’s a market leader, it operates in a relatively defensive sector and, at a share price of 130p, it has a dividend yield of almost 6%.

These are all attractive features and it’s why I wanted to take a closer look.

However, when I glanced at the stock’s long-term price chart I was somewhat surprised to see very large peaks and troughs, spread out over the last 20 years. 

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3 High yield bargains (or are they?)

Three companies in the UK Value Investor model portfolio are currently facing huge amounts of negative sentiment.

Their dividend yields are over 7% and there are obvious and entirely plausible reasons why each company might be about to cut its dividend.

However, no dividend cuts have yet been announced (apart from a very tiny cut in one case) so it’s impossible to tell (yet) whether Mr Market is right to be so pessimistic. 

Perhaps these companies will surprise Mr Market with excellent results a year or two from now and, as a result, their share prices will soar. Or perhaps Mr Market is right and dividend cuts will be announced very soon.

We just don’t know for sure.

But regardless of the final outcome, these three companies hold many lessons about the ups and downs you should expect when you invest directly in individual companies, and the nerve you’ll need if you want to avoid selling at the first sign of trouble.

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Is Sainsbury’s worth its heavily discounted share price?

Poor old Sainsbury’s. Its share price is currently lower than at any time over the last 25 years and appears to be in free-fall.

But how can this be? Surely Sainsbury’s is a defensive dividend payer with a long record of unbroken dividend payments and a core supermarket business which is about as dependable as they come?

Well, perhaps not. The big UK supermarkets have had problems ever since the financial crisis made consumers far more cost conscious than they were before. The market effectively fell into the laps of Aldi and Lidl, and Sainsbury’s has been playing catch up ever since.

To build greater economies of scale, Sainsbury’s proposed a merger with ASDA in 2018 and the market briefly became optimistic about the company’s prospects. But that deal was eventually blocked by the Competition and Markets authority and Sainsbury’s shares are now about 40% below where they were last summer.

As a dividend-focused value investor that sort of decline sparks my interest, so in this month’s Master Investor magazine I decided to look at whether Sainsbury’s is finally good value or not.

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Does Reckitt Benckiser’s 30% share price decline make it good value?

Reckitt Benckiser is one of the world’s leading fast moving consumer goods companies, selling familiar products like Dettol, Durex, Nurofen, Vanish and Cillit Bang.

In recent years RB and similar companies like Unilever have become very popular with investors, largely because they offered a seemingly low risk way to invest in shares whilst still achieving attractive returns.

For a long time RB lived up to that promise, but more recently things have become less certain and RB’s share price has declined by almost a third since its 2017 high.

This share price decline has driven the company’s dividend yield up to 3%. That’s below average, but it’s still much better than the sub-2% yield RB was offering a couple of years ago.

So does this lower share price and higher dividend yield mean Reckitt Benckiser is good value again, or is it just an overpriced seller of cheap goods?

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Learn from my mistakes and avoid these three value traps

Most investors found 2018 to be a bumpy ride and I was no exception.

The market price of my portfolio declined by more than 10% during the year, which was mildly annoying. But that’s not really what I’m talking about.

When I talk about a bumpy ride, I mean bumpy in terms of the performance of the companies I’m invested in rather than the performance of their shares. And in that regard, 2018 was too bumpy for my liking.

I’m not saying 2018 was a complete disaster, because it wasn’t; but it was bad enough to make me take a step back and review my investments and my investment process from the ground up.

What I found was that several of my current holdings (and several of my past holdings) fell into one or more of three classes of value trap:

  1. Companies with large recurring ‘exceptional’ costs (e.g. Centrica or N Brown)
  2. Companies with wafer thin profit margins (e.g. Mitie or Interserve)
  3. Companies undergoing business transformations (e.g. N Brown)

Having uncovered these value traps, I then came up with a handful of strategy tweaks designed to stop me falling into the same traps again.

I thought some of this would be useful for other investors, so I summarised the whole lot into an article for Master Investor magazine.

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Buy Unilever. Sleep for 20 years. Wake up rich?

Unilever has produced amazing results for shareholders over many decades and especially in the last ten years.

Its shares have more than tripled since their 2009 lows and, with progressive dividends included, shareholders have seen returns of around 15% per year over ten years.

That would be impressive for any company, but it’s even more impressive given Unilever’s defensive nature, thanks to its large portfolio of defensive consumer products such as Domestos bleach, Matey bubble bath and Ben & Jerry’s ice cream.

However, it’s a fact that trees do not grow to the sky and companies cannot grow faster than average forever.

So does this mean the good times are finally over for Unilever investors, or is the company still a no-brainer if you’re looking for income and growth?

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Dissecting N Brown’s dividend cut with 20/20 hindsight

As I’ve mentioned several times before, 2018 was not a vintage year for my model portfolio.

It wasn’t a terrible year either, but there were more bumps along the way than I would have liked.

One of those bumps was caused by N Brown, the size 20+ and age 50+ clothing retailer, when it cut its dividend in half.

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Should you look at free cash flows to find safer dividend payers?

In December I wrote an article for Master Investor magazine talking about ‘my stock market tip for 2019’.

At the time I was looking to switch my investment strategy from an earnings-based approach to one centred around free cash flows (i.e. operating cash flow minus capital expenses).

However, after some additional thought and meditation I have decided to back-track somewhat on my short-lived enthusiasm for free cash flows.

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WH Smith: A good choice for dividend growth investors?

When I think of WH Smith, I think of a company which sells products that are either:

  • in decline (physical newspapers, magazines and books),
  • can be purchased more easily online (note paper, pencils, exercise books) or
  • are basically extinct (CDs, DVDs and vinyl records).

In other words, my default mental image is of a company destined to become the next Woolworths.

However, if you look at WH Smith’s financial results over the last decade, you’ll see a company which has grown its earnings and dividends per share by about 10% per year, every year. That’s pretty amazing, especially for a company over 200 years old.

That’s partly why I decided to review WH Smith in my latest article for Master Investor magazine.

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Is Hargreaves Lansdown’s dividend yield too low for income investors?

Hargreaves Lansdown is a name we’ve all heard of. It’s the dominant leader of the investment platform market and its 40% market share is about four times that of its largest competitor.

Despite its size, it’s still growing quickly with a ten-year dividend growth rate of almost 17% per year.

That’s impressive, but perhaps more impressive is the company’s astronomical 70% average ten-year return on capital employed.

In fact, Hargreaves Lansdown is so profitable that the FCA has launched an investigation into the competitiveness of the investment platform market (although I guess those two facts could be unrelated).

Hargreaves Lansdown’s massive growth and profitability are extremely attractive features, but that attractiveness has driven the share price up and the dividend yield down, and today the company’s dividend yield is well-below 2%.

For some income investors, a sub-2% dividend yield will be unacceptable, and that includes me. But perhaps I’ll make an exception for a company as exceptional as Hargreaves Lansdown.

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Is Ted Baker the perfect dividend growth stock?

Ted Baker is an interesting company.

It started life in 1988 as a single store in Glasgow, selling its own brand of men’s shirts. 30 years later it’s listed in the FTSE 250, has several hundred stores and concessions and generates revenues of more than £500 million and net profits of more than £50 million.

That happy little success story is somewhat interesting, but as an investor what’s more interesting is the company’s near-perfect growth record.

What do I mean by “near-perfect”?

Well, Ted Baker joined the London Stock Exchange in 1997 and from then onwards its revenues and dividends (which it started paying in 1999) have increased every single year. And if it wasn’t for a minor one-year decline after the financial crisis, its profit growth would be just as impressive.

As a defensive value investor, I find that sort of consistency very interesting, along with its double-digit growth rate and near-3% dividend yield.

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3 High yield capital light compounders

One nice feature of the stock market is that you don’t have to reinvest your income to benefit from compound interest.

That’s because most companies retain a significant portion of their profits even after dividends have been paid.

Those retained profits are then re-invested in the business, compounding profits even if you don’t reinvest your dividends.

Some of the best profit compounders are known as capital-light compounders.

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