F or property investors, the mantra is: “Location, Location, Location”. But for equity investors like me, it is: “Dividends, Dividends, Dividends”.
Apart from the obvious benefits of dividend receipts – particularly when paid free of tax in an individual savings account (Isa) – the paying of a dividend by a PLC acts as a discipline, as the cash cost has to be generated. A dividend yield also provides a prop to a share price.
I try to judge future pay-outs by looking at a company’s dividend record and its statements on dividend policy. So a recent comment by Edward Ziff, chairman of property company Town Centre Securities, accompanying the announcement of a 27 per cent increase in the total dividend, is encouraging.
“We manage our portfolio to generate a sustainable and progressive dividend for the benefit of our shareholders and will continue to deliver attractive returns,” he said. I remain firmly on board.
Over the years, annual dividend increases can generate splendid returns.
PZ Cussons – my largest holding, which I first bought in 1976 – now yields an annual 30 per cent of its cost price, while marine services provider James Fisher, first bought in 2000, yields nearly 20 per cent.
Investors are frequently warned against chasing high yields but my guess is that far more non-dividend payers than good payers go belly-up. Over the years, I have bought many shares on or near double-digit yields – most recently Fenner and BBA Aviation during the recent financial maelstrom – and have
been rewarded when a
re-rating of the shares
sees the share price recover and the yields fall back. Those two companies’ shares have risen, pushing their yields down to 2.9
per cent and 4 per cent respectively.
There have been other examples in recent months. I described insurance company Aviva as a “snip” when yielding 8 per cent in May – it is now yielding
6 per cent at 400p. I also bought Vodafone on a 6.5 per cent yield at 122p – it is now yielding 5 per cent at 160p. A recent success on the Alternative Investment Market was buying incentive voucher specialist Park Group. It yielded nearly 8 per cent for some time, but now yields only 4.5 per cent following a major re-rating.
Of course, I have had my disappointments. My large Pochins dividend is no more, and I got caught out with a holding of Aero Inventory. Meanwhile, the jury is out on retailer HMV, where the running yield is an extraordinary 15 per cent. Its pre-Christmas trading will be crucial. However, I have a 5.6p dividend arriving on November 6 – tax-free in my Isa – a 10 per cent return on the current 48.25p share price.
Meanwhile, a typical over-reaction to profit warnings has presented new buying opportunities.
Charles Taylor, which provides insurance through 45 offices in 22 countries, fell in price to offer a 8.5 per cent yield and a price/earnings (p/e) ratio
of 7 on likely profits. Given its progressive dividend history, I expect a maintained pay-out.
Dairy Crest, our leading dairy products PLC, looks fundamentally under-valued on a 5.5 per cent yield and a p/e of 7. Its shares fell after a profits warning from milk supplier Robert Wiseman, but approximately two-thirds of Dairy Crest’s profits come from its cheese and spreads brands. I added to my holding following a visit to the company.
Focusing on established profitable PLCs has certainly paid dividends
John Lee is an active private investor, writing about his own investments. He may have an interest in any of the companies, securities and trading strategies mentioned.