JOE GILL: Investors need to pay more attention to the dividends

Financial data for 2016 is on the way and Joe Gill says it’s time we pauid more attention to our investments and dividends.

Results season is upon us and, over the next number of weeks, a long list of companies will release their financial data for calendar year 2016.

While stock market investors tend to permanently look forward rather than back, there is one crucial element in these sets of results that has to be examined by any serious long-term investor, and that is dividends.

Dividends play a huge role in providing long-term tangible returns for equity investors and over the past seventy years that have provided as much as 90% of total returns.

It is a subject that receives cursory commentary in the financial media, yet it is the only channel by which companies actually hand over hard money to their investors on a regular basis.

Full-year results allow analysts and investors to weigh up the actual dividend performance of an individual company over a full year and assess that against long-term metrics.

A sweet spot for many investors is evidence that a company has the capacity and will to grow its dividend over an extended period.

An example of this illustrates the benefits. Imagine a company with a profit of €1, a dividend of 50c and a share price of €10.

That set of numbers implies a price-earnings ratio of 10x, a dividend yield of 5% and dividend cover of two times. Now imagine it grows that dividend by 10% a year and this matches its profit momentum which continues for 10 years.

After 10 years, the dividend is 130c and profits are €2.6. Assuming the price-earnings ratio is maintained, which the profit and dividend performance would justify, then the share price should be around €26.

If this scenario unfolds then an investor who spent €100 on shares in Year 1 will have garnered no less than €352 within a decade including dividends of almost €100.

Of course, the share price will have oscillated over the intervening period but a management team and board that can hold course on dividends and financial performance will have rewarded their investors well.

This example is simplistic, and subject to the usual caveats that equities are a high-risk asset class, but it nonetheless helps explain the power of dividends and compounding.

In the next number of weeks, a range of Irish companies will announce results with accompanying decisions on dividends.

Those cash payments will be made over the next three months and can be received by investors who have Prsa type investments on a tax-free basis.

It is always worthwhile to review in early summer how much actual cash your portfolio of companies produced for the 2016 financial year.

It is also of value to assess if your companies grew dividends year on year and also what if any comments were made about future dividend policy.

Ideally, you want to see your dividends well covered by retained cash earnings as that suggests the underlying financial integrity of the company has not been eroded by excessive payments.

If the dividend cover is, for example two times, it would imply that 50% of net profits have been kept inside the business and are available to either lower debt or fund investments by the business on acquisitions or internal projects.

At a time of considerable geopolitical and financial market volatility, I find a focus on dividend strategies by individual companies is a soothing way to analyse any portfolio.

It also helps eliminate the noise around daily movements in share prices and provides an annual check-list on how a savings or investment pot is delivering for its owner.

Joe Gill is director of corporate broking with Goodbody Stockbrokers. His views are personal.


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