Category: In the Media

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%.

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.

Stagecoach Group (stagecoach.com) 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. 

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.

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.

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?

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?

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.

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.

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.

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.

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.