The UK media is now increasingly becoming dominated by discussions of the general election in June. With the French election now out of the way, investors have time to ponder the political and economic implications of Theresa May’s decision to call a snap election. There will be much sniping by the major parties at each other, and there is always scope for an unforseen result to shake markets up a bit. What, then, if things begin to look dire (other than shorting the FTSE 100 with a CFD)?
Let’s not forget the FTSE fell 2.5% following the announcement of the election. Further volatility is possible as debate focuses on Brexit and indeed the continued existence of the UK in its current format.
According to Russ Mould, investment director at AJ Bell, the UK stockbroker:
“Investors must consider whether the election and the potential outcome really changes the long term cash-flow generating powers of the FTSE 100’s members before they decide whether to take evasive action – or use any sustained market weakness as a chance to buy what may be good assets going cheap. After all, it is now nearly 10 years since the Great Financial Crisis broke in earnest and yet 26 FTSE 100 firms can still proudly say they have increased their annual dividend payment for each and every year since 2007, despite everything that has been thrown at them in the meantime.”
The 26 stocks in question have generated an average share price gain of 232% , compared to a 13% gain in the FTSE 100. Only one, SSE, has failed to beat the index over that time, and 20 have seen their share price at least double.
Among the leaders are Ashtead, with a 10 year share price performance of 957.3% and dividend CAGR of 26.5%. Others at the top of the table include Micro Focus International (+957.1%), Intertek (+342.3%), Shire (+334.6%) and Compass (+331.8%). Of these five, none have seen a dividend CAGR of less than 11.4%
Other high dividend blue chip stocks in the list which are worth a mention include Croda, Paddy Power Betfair and St James’s Place.
“Consistent dividend growth has led to an average total return of 505% against 64% from the FTSE 100,” explains Mould. “All 26 have done better than the headline index in total return terms over the past decade.”
Topping the total return list by a serious margin is Bunzl, which provided investors with a staggering +4169.8%. This is over three times as much as Micro Focus International, ranked second.
Mould says that the simplest explanation for these stunning returns is that the share prices have grown into their dividend as the shareholder payout has gradually increased. Using their 14 April 2007 share prices and the dividends ultimately paid for 2007, the 26 stocks on AJ Bell’s list were offering a yield of 2.4% a decade ago. Yet using their 14 April 2007 share prices and the dividends paid for 2016, the 26 names were offering a yield of 7.6%. a figure that would have probably been enticing for investors, especially given what has subsequently happened to headline interest rates and government bond yields.
Admittedly, some of these companies were not in the FTSE 100 in 2007 – for example, CDD, Paddy Power Betfair and St James’s Place have all risen through the UK corporate ranks in the past decade.
“Equally, care must be taken, as the past is no guarantee of the future,” says Mould. “In the past two years several firms who had consistent dividend growth have failed to add to their record, with terrible share price consequences.”
Among these is Pearson, following its decision to hold its pay out for 2016 and cut its 2017 dividend. Other companies that have seen share prices fall following a golden run of dividend increases include Tesco, BHP Billiton and Rio Tinto.
“It is therefore important to check earnings cover the dividend and make sure a company is not having to strain to keep its run going, as diverting cash to fund the distribution and away from investing in the day-to-day business could weaken a company’s long-term competitive position…it is stength here that ultimately provides the pricing power which in turn provides the consistent cash flow that makes the payments possible,” Mould concludes.
Things to bear in mind when choosing high dividend blue chip stocks:
- Investing is about patience
- Investing is all about trying to pick well-run, well-financed companies with sound business models rather than trying to second-guess near-term events or macroeconomic and political trends.
- Income investing is not just about finding the fattest high dividend blue chip stocks and harvesting the dividends, but spotting firms capable of consistent dividend growth when it comes to generating the best total returns from a portfolio of shares.