Share dividends rightly return to the spotlight

At a time when high quality bond yields are collapsing to zero, the value and importance of dividends from equities has never been more important.

I find it remarkable that mainstream financial media, and indeed many inside the financial services market bubble, pay lip service to the crucial role dividends play in protecting and enhancing investor wealth.

Instead, it seems that daily rising and falling share prices are the preoccupation of the chattering classes, particularly on business TV.

One set of numbers should put a stop to this over-zealous fixation with share price cartoons. Between 2000 and 2016 the FTSE All-Share Index is just 14% up, according to Capita.

However, if you take into account dividends and re-invested those in the index you would have generated a handsome 90% return.

So, while various TV anchors were lathering themselves about one share price going up and another down those who patiently focused on managing dividends in their portfolio outpaced the great unwashed.

That policy applies even more in the current environment where valuations are at elevated levels and tangible returns in all assets have been squeezed.

It is, in this context, very encouraging to see a group of Irish companies declare meaningful increases in their dividend payouts during the recent reporting season.

Moreoever, many of these have announced increases in dividends that sharply exceed the rate of inflation but they have done so without cutting into the financial strength of their businesses.

They have done that by keeping the percentage of retained earnings shelled out in dividends to a conservative level.

This helps ensure these businesses have the financial resources to continue investing and growing without harming the integrity of their companies.

There was very little fanfare about this in the media.

A gnat would have paid more attention to the dividend policy this reporting season compared to the coverage of other aspects of the businesses.

Maybe that is because dividends and everything to do with them tend to be boring.

Flashy charts and sharp jagged share price lines pointing to “big” sell-offs and “huge” gains capture the imagination next to the dividend news.

Indeed, companies themselves often leave the dividend comment toward the end of results statements.

A random stroll around the Irish company reporting season illustrates a factual and impressive dividend performance this summer.

The fresh produce company Total Produce increased its dividend per share by 10%; yet that payment continues to be just 13% of after-tax earnings.

The shipping company ICG lifted its dividends by 5% and that absorbed only 38% of its earnings. Kerry group raised its dividend by 12% and that accounted for just 13% of its earnings. There are plenty of other examples too.

In a year when inflation is close to 1% and interest rates are at low single digit percentages any financial asset that delivers a 10% rise in its payment to you as a shareholder ought to be celebrated.

Indeed, there is an argument that management teams and boards, who show an ability and will to tangibly reward shareholders in a sustainable manner while building their companies, should be widely congratulated.

Many moons ago dividends were a central focus when investors weighed up whether or not they would support a company’s share.

That centre of gravity shifted towards the pursuit of so-called growth stocks in the intervening period.

These are businesses that committed to executing on growth plans by investing all available resources including money that previously financed dividends.

Share price appreciation became the elixir of that world view of finance.

The weight of balance shifted too far in favour of growth themes before the Global Financial Crisis. Amid QE and a financial landscape parched of tangible annual returns I suspect the dividend geeks are making a big comeback.

As one of those who has to rely on a self-generated store of value to fund life after work dividends have been a keen area of interest for me over many years.

On reflection, it has never been the headline makers that formed the nucleus of shares which have helped beat inflation over an extended period.

Rather, it is those management teams who genuinely concentrated on creating businesses that could not only pay dividends but were able to do so through thick and thin that made all the difference.

The same should apply forthwith.

That old tale about the hare and the tortoise comes to mind.

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


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