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I’ve always been a fan of dividends — reinvested and compounded — they’ve played a big part in my Isa’s growth over the years. Much less appealing was the pursuit of “total return,” that is, a focus on total return driven primarily by capital growth at the expense of income.
That may be okay when stocks are on a strong upswing. The argument is that you can always sell some of your stock if you need the cash. But in a bear market like the one we’ve had recently, capital depreciation combined with little or no earnings is hardly encouraging.
It’s probably due to my accounting training and self-discipline, but I’ve always distinguished between capital and income, and seed nibbling isn’t for me. I like companies I’m invested in to at least maintain the dividend ratio in a difficult time, if at all possible, as reducing or paying out dividends always leaves a scar on a company’s balance sheet that can never be erased.
Currently, severely depressed markets have produced very attractive dividend yields, and I have moved a great deal from my own and my family’s portfolios into companies like Aviva or Legal & General – sort of private sector ‘gilts’. Many solid, established and profitable small caps now also offer attractive returns.
Of course, after recent rate hikes, depositors can earn returns of 6 percent or more on bank deposits, but how long will these rates last? Years ago, I wrote an article about my “double 7” approach, in which I advocated aiming for both a dividend yield and a price-to-earnings ratio of 7. I never thought those times would come again!
With this in mind, I enjoyed a recent opportunity to advise on and build a conservative, income-focused portfolio for a family charity. What a wonderful time to have cash to invest given the dividend yields currently available.
A balanced portfolio – without excessive diversification – is desirable. I’ve selected 16 stocks with a large-cap bias, all of which offer a dividend yield of 5 percent or more. At its “core” there were three holdings each in Aviva, Legal & General and M&G, all with yields of at least 8 percent. Then five two-entity holdings — British American Tobacco, Phoenix, Primary Health Properties, Secure Trust, and Taylor Wimpey — again juicy returns averaging about 7 percent.
The first two need little introduction; Despite its debt, PHP should at least be able to sustain dividend payments given the government’s guaranteed rent payments. Niche lender Secure Trust must be extraordinarily cheap — I note the CEO just made a remarkable purchase — and Taylor Wimpey, with its large acreage and cash position, presents an excellent buying opportunity when we need to be at or near the bottom of the housing cycle.
We ended up buying eight individual small-cap holdings — all dedicated and consistent dividend payers: Anpario, Chesnara, Duke Royalty, MP Evans, Hollywood Bowl, STV, Workspace, and VP. This group has an expected total return of 6 percent with the potential for a significant share price recovery and potentially a takeover target from time to time.
With the above weightings, this portfolio should deliver an overall dividend yield of close to 8 percent. Even if a few positions disappoint, projected returns should still be very satisfactory and the strength of large caps allows for easy access to liquidity should there ever be a need to intervene in capital – happily a distant possibility.
As for my own portfolio, performance has been extremely mixed. Disappointing trading news hit corporate brokers Christie Group, although I think it’s still significantly undervalued, and content creation equipment supplier Videndum continued to fall, suffering the impact of the Hollywood strikes. Let’s hope there will be a solution here soon.
On the brighter side, we had encouraging optimism from Concurrent Technologies as trading recovers from supply chain delays and semiconductor shortages, along with a key US acquisition as it builds its defense business. I expect that in two or three years it will be a lot more valuable and a lot better known as a British public company.
However, the most recent highlight of my investment life has undoubtedly been visiting the family-run engineering group Goodwin, based in Potteries. In my 60 years as an investor, it has to be one of the best companies I’ve owned.
I have never seen family leaders so growth oriented and committed. They have almost unique capabilities in the UK and have grown into a major supplier of large, technically advanced castings. With a focus on nuclear decommissioning and the marine markets, both sectors helped the company post a 68 percent increase in orders last year. About 25 percent of sales are defense – the company is a key submarine component supplier to the UK and US navies and should benefit over time from the Aukus Security Pact.
Among many other activities, Goodwins is also nearing production of an exciting new product called Duvelco, a polymer resin that can withstand very high temperatures. All of which should hopefully lead to increasing profits in the years to come.
Lord Lee of Trafford is an active private investor and shareholder in all of the companies mentioned
https://www.ft.com/content/3a80d337-cd09-4d16-94f7-ec7e08720669?ftcamp=traffic/partner/feed_headline/us_yahoo/auddev&yptr=yahoo My dividend strategy is still working