If you want to generate maximum capital growth and dividend income from your portfolio, it may be time to join the aristocracy, or rather, the dividend aristocracy.
In the US, a 'dividend aristocrat' is defined as a company that has increased its dividend for 25 consecutive years, which suggests a strong, healthy company that generates generous cash flows to fund its shareholder payouts.
History suggests that dividend aristocrats can rule the market. In the 10 years to September, 30, 2019, the S&P 500 Dividend Aristocrat index returned on average 14.67 per cent a year, against 13.24 per cent for the index as a whole.
That kind of outperformance adds up over the years. At that rate of growth, $50,000 (Dh184,000) invested in the dividend aristocrat index would be worth $196,548 after a decade, against $173,368 from the whole index, that’s $23,180 more.
US dividend aristocrats include Coca-Cola, Johnson & Johnson and Colgate-Palmolive. In the UK, power giant SSE, cigarette companies British American Tobacco and Imperial Brands all feature, while Europe boasts French yoghurt maker Danone, Munich Reinsurance, oil company Total and German manufacturer Siemens, which all display aristocratic habits.
You can buy exchange traded funds (ETFs) tracking the various dividend aristocrat indices, or alternatively, buy individual stocks.
We asked advisers to name the dividend aristocrats they admire right now, to produce seven top performers.
Their suggestions have mostly had a successful last 12 months, enjoying strong share price growth as global markets rose generally.
As a result, some look expensive, by traditional metrics. Typically, a price/earnings ratio of around 15 or 16 is thought to represent good value, although the US S&P 500 index trades at more than 31 times earnings.
Some of the stocks in this article trade above that, but this also reflects how much they are in demand from investors.
Also, do not judge an aristocrat by the size of its current yield. The yield is calculated by dividing the dividend payout by the share price, so when the share price rises strongly, the yield falls, making it look less attractive than it really is.
What really matters is the commitment to increase shareholder payouts, year after year, which is the sign of a true dividend aristocrat.
Singapore Telecommunications Limited
Market cap: $40.96bn
P/E ratio: 37.62 times earnings
One-year performance: 17.11 per cent
Dividend: 5.16 per cent
Vijay Valecha, chief investment officer at Century Financial in Dubai, picks out Singapore Telecommunications, or Singtel, founded 140 years ago, whose services include landlines, mobiles, data, internet and TV.
Most of the group’s revenue come from Australia and Singapore, Mr Valecha says. “It is one of the largest listed companies of Singapore by market capitalisation and has stakes in leading companies across Asia including Bharti Airtel, Telkomsel, Globe Telecom and Advanced Info Service.”
The group has to invest heavily in 5G wireless technology and Mr Valecha says this might dent profits in the short term. “However, overall debt should remain stable, and the free cash flows needed to cover its dividend should recover once the investment phase is completed,” he adds.
Market cap: $123bn
P/E ratio: 30.96 times earnings
One-year performance: 26.69 per cent
Dividend: 3.45 per cent
Paris-listed French global pharmaceutical company Sanofi has a consistent track record of raising dividends, Mr Valecha says. “It boasts a strong R&D pipeline, which should help drive future revenue.”
Sanofi is also improving profitability by streamlining operations and reducing costs. “Its strengths are its speciality care segment, where its Dupixent treatment for allergic diseases such as eczema and nasal polyps enjoys around €2bn (Dh8.09bn) in annual sales.”
While its recent third-quarter sales dipped slightly management remains confident of meeting full-year targets, while Mr Valecha says the profitability of its vaccines and consumer healthcare franchise is improving.
Pharmaceutical companies are traditionally seen as “defensive" stocks, which should continue to perform well even during an economic downturn, and that can help balance higher risk stocks in your portfolio.
JP Morgan Chase
Market cap: $417.62bn
P/E ratio: 12.75 times earnings
One-year performance: 32.59 per cent
Dividend: 2.70 per cent
Richard Nackenson, senior portfolio manager at investment management firm Neuberger Berman, highlights New York City-headquartered investment bank JP Morgan Chase for its track record of increasing dividends regularly. “It has increased its overall capital return to shareholders, including dividends, every year since 2011," he says. "Most recently, in June 2019, it announced a 13 per cent dividend increase.”
Last July, it announced plans to return $40.4bn to shareholders over 12 months, a record for any US bank. “The total approved annual capital return was approximately 11 per cent of the company’s market capitalisation at the time,” Mr Nackenson says.
JP Morgan Chase is the largest bank in the United States, according to S&P Global, and the sixth largest in the world. In 2019, it made profits totalling a massive $36.4bn, more than any bank in history.
Mr Nackenson says the bank offers a diversified range of financial services, with leading franchises in consumer banking, corporate and investment banking, commercial banking, and asset management. “It remains well positioned to return capital to shareholders through dividends and share repurchases due to its strong balance sheet and ability to grow earnings per share,” he adds.
Market cap: $281bn
P/E ratio: 16.47 times earnings
One-year performance: 33.07 per cent
Dividend: 5.40 per cent
Dallas-based US telecoms company AT&T is now parent company of WarnerMedia, making it the world's largest media and entertainment company in terms of revenue.
The TimeWarner purchase in 2014 left the group with debts of $153bn, but Mr Valecha says it is clearing this faster than expected, paying off $12.5 billion already. It will further reduce the debt after announcing $11.5bn of asset sales in 2019, with more lined up this year. “The three-year strategic plan involves paying off all its debt from the purchase and selling off non-core assets," he adds.
AT&T is now rolling out its 5G services and this year’s launch of new streaming service HBO Max should boost its competitive position, Mr Valecha added.
The group’s total third quarter operating revenue fell slightly to $44.59bn, but share price growth remains strong.
Market cap: $202.85 billion
P/E ratio: 16.25 times earnings
One-year performance: 27.08 per cent
Dividend: 2.06 per cent
Mr Nackenson highlights another US dividend hero, media, entertainment and communications company Comcast.
Comcast has just posted fourth-quarter revenue of $28.4bn, up 2 per cent year-on-year, boosted by strong performance from recent acquisition Sky, bought for $39bn in 2018 after a fierce bidding war with Rupert Murdoch’s Fox.
Mr Nackenson admires the group for using its healthy cash flow and return capital to shareholders. “It also repaid over $11bn in debt in 2019 in the first three quarters of the year, and simultaneously increased its dividend," he says.
The media titan has now lifted its dividend at a double digit rate every year since 2009, he adds. “Comcast continues to grow broadband customer relationships and increase its free cash flow generation.”
Market cap: $22.93bn
P/E ratio: 37.63 times earnings
One-year performance: 33.02 per cent
Dividend: 0.62 per cent
Food company Kerry Group is headquartered in Dublin, Ireland, but is also listed on the London stock exchange. It supplies ingredients, flavours, powders, sauces and concentrates to help food companies maximise taste and nutrition in their products.
Russ Mould, investment director at UK-based online trading platform AJ Bell, says Kerry Group’s current yield may seem low but it has a track record of healthy dividend growth stretching back 20 years. “As a leader in ingredients and packaged foods, it benefits from relatively consistent demand, since everyone has to eat.”
Mr Mould believes Kerry could also benefit from the shift towards veganism and plant-based alternatives to meat products, as its ingredients could be used to make artificial burgers taste beefier, but less salty and starchy. “In 2019, its established brand Richmond launched its first meat-free sausage, while its new brand Naked Glory now sells meat-free meatballs, burgers, mince and sausages.”
In November, it reported a 10 per cent rise in third-quarter revenue with business volumes of 3.1 per cent.
Market cap: $6.14bn
P/E ratio: 20.10 times earnings
One-year performance: 59.41 per cent
Dividend: 3.75 per cent
British water utility and waste management company Pennon Group has been regularly hiking dividends since the late 1990s and Mr Mould expects that proud record to continue. "The firm has a policy of increasing its dividend by inflation, as measured by the retail price index, plus four full percentage points each year,” he adds.
As a utility company, Pennon benefits from steady and predictable demand, with earnings regulated by UK government bodies, giving a clear indication of its company’s cash flow potential. “This is important because it is cash flow that pays the dividends,” Mr Mould adds.
Pennon Group also owns a waste-management business called Viridor, which could go up for sale after a strategic review, generating more cash.
Investors were wary of British utilities before December's general election, because Jeremy Corbyn’s Labour leader had pledged to nationalise them if they won. “The threat has lifted following Boris Johnson's victory, and this may open up the water industry to a fresh wave of consolidation and bid activity.”