In data from the famous Dartmouth professor Kenneth French, we have value-weighted monthly returns of dividend-paying stocks and non-dividend-paying stocks dating back to 1927. Since this inception date, a portfolio of dividend paying stocks out-performed the portfolio of non-dividend paying stocks by a factor of over 3.3 times, which translates into a 1.48% total return advantage each year. This return advantage is generated with meaningfully less risk as measured by the standard deviation of monthly returns, especially during periods of economic recession.
So, we know dividend-paying shares are more likely to out-perform non-dividend paying shares in the long run. There is however a super-charged version of this strategy, which focuses on consistent dividend growers only. They must never skip or withhold a dividend and their dividends need to be ever increasing, year after year.
There are a number of good reasons why local investors should favor companies that have a consistent history of increasing dividends:
- They are consistent (they never skip or lower a dividend) and
- If one re-invests these dividends back into the share, then a well-known compounding effect even further accelerates growth of your investment.
- Lintner (1956) observes that management only raise dividends when they believe that earnings have permanently increased. This implies that firms that continually increase their payments envisage a positive outlook for profitability.
- Barth (1999) show that firms with a pattern of increasing earnings have been accorded higher price-earnings ratios after controlling for growth and risk. Given that in the long-run dividends and earnings are inexorably linked, this appears to bode well for the valuations of consistent dividend payers.
- Arnott and Asness (2003) demonstrate that, in aggregate, higher dividend payouts are consistent with higher future earnings growth.
- Walker (2005) supports the case for investments in consistent dividend payers.
- In the 10 years to April 2005, it is stated that a basket of US securities with at least 10-years of consistent dividend growth outperformed the S&P 500 by 3.28% per annum coupled with the advantage of two percentage points lower volatility.
- This strategy has been proven in the South African (JSE) context as well.
So just how do we go about selecting these shares? Our research and experience has shown that JSE shares that can consistently increase their dividend payments, for at least 5 consecutive uninterrupted years, from like-to-like reporting periods, are likely to outperform the general market both from a capital growth perspective and a dividend yield perspective.
Let’s examine how we determine at least ONE year of uninterrupted dividend growth, assuming the most latest financials published by a JSE firm are the 2017 Interims:
If the most latest financials available are 2017 Finals for example, then we just apply the same principle above going back to the 3 prior financial reports. If the two conditions in the image above are met, then we have at least ONE year of uninterrupted dividend growth. So, requiring at least 5 years of sequential, uninterrupted growth necessitates the examination of the last 12 sets of known sequential financials, which can be a tedious task. In this exercise we also need to exclude REITS and Property stocks as these by definition are income plays that pay regular dividends.
Fortunately, Sharenet Analytics clients can pull up this list at a press of a single button in their JSE Share Watchlist (JSW), which reveals a list 25 shares long, ranging from 18 to 5 years sequential, uninterrupted dividend growth. We have just shown the top 11 candidates below. Click on the share name for details on the company and a chart of its share price, and click on the sector name to see the shares’ peers:
There are another 14 candidates not included above with at least 5 years consecutive, uninterrupted dividend growth. They are:
Obviously, the serious investor will take more into consideration than just the consistent dividend paying profile, as being in this list is no guarantee for the company to avoid misfortune or mismanagement. But if one restricts one’s choices to the whole list (the more the merrier) it will surely raise your odds of out-performing the general market.
It can be a bit of work constantly rebalancing your portfolio to ensure it only consists of consistent dividend payers. If a company announces results and you see they skipped a dividend or dividends shrank, you would have to sell that share out your portfolio and try find another replacement. Alternatively, you can invest in Sharenet’s Dividend PSP (Personal Share Portfolio) which uses Sharenet Analytics as part of its process to construct and actively manage a portfolio of high dividend-paying shares in the JSE Top 40 and Mid Cap indices, giving you a high yield and steady capital growth. You can find out more with this Sharenet Securities contact form.
If you want to manage your own high-performance dividend portfolio but don’t have the time to do all the work to find the right shares, you can try Sharenet Analytics for a 50% Discover discount (first timers only) by contacting firstname.lastname@example.org or use this order form.
Dwaine van Vuuren
RecessionAlert, Sharenet Analytics
Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research (now Sharenet Analytics) into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.