If you rely on a portfolio of shares for some or all of your income, it’s important to find companies that can be trusted not to cut their dividends. Better still, though, are the companies that keep raising them.
Quite simply, many pensioners depend on these payouts to supplement their pension — and retirement may last decades. A dividend stream that fails to rise will be severely degraded by the effects of inflation over such long periods.
Research from JP Morgan brings home the importance for all investors of picking companies that grow their dividends, rather than those with a high current yield on each share.
The investment bank said someone who bought all the high-yielding stocks of the MSCI World Index in 1988 would have seen their money grow roughly 10-fold, whereas investing in high-yielding stocks that also offered high dividend growth multiplied their original money by 20 over the same period.
So how can you find companies that consistently raise their dividends?
Last month on the Telegraph website, we identified some of the British companies that had long records of maintaining or raising dividends every year . Shell, for example, has not missed a payment since the war, while Cobham, the company that pioneered in-flight refuelling, has a record that stretches back 43 years.
But there is no need for income seekers to confine themselves to British firms — there are plenty in the United States, Europe and farther afield that have similar or better dividend records.
In fact, income investors who limit their holdings to British companies cut down their options drastically. If you want to find companies that yield 3pc or more, widening your search from Britain to the rest of the world increases the number of possibilities 10-fold, according to JP Morgan. It said there were only three industrial companies in the UK with a dividend yield of more than 3pc, but 37 in the rest of the world. It’s a similar story in other sectors.
Meanwhile, 270 US companies in the S&P 500 index have increased their dividend so far this year and the average dividend increase was about 28pc. That compares with just single-digit dividend growth in the UK, the bank added.
The US seems to be better at producing companies that can grow their dividends without interruption for decades at a time. Stock market indices that consist exclusively of such companies illustrates this trend.
S&P has “Dividend Aristocrats” indices for Britain, America and Europe. To qualify for the US Dividend Aristocrats index a company must have a 25-year record of paying dividends that rise from one year to the next — and 52 shares currently make the grade.
But this hurdle is too high for Britain and Europe, so S&P has cut the requirement for entry to these indexes to just a 10-year record. Companies must meet various other criteria to be included.
Here are some of the American firms with exceptional dividend records.
Exxon, the oil company, has been paying dividends for 131 years — since 1882. It has increased the payments consecutively for the past 28 years.
Coca-Cola and Colgate Palmolive have both been paying dividends for more than 100 years, while Dover, a diversified global manufacturer, and Genuine Parts Company, which makes automotive and other components, have both raised their dividends for more than 50 years in a row.
Among the companies to qualify for the US Dividend Aristocrats index by increasing their dividends every year for at least the past 25 years are Stanley Black & Decker, the tool maker, Consolidated Edison, the energy company, Procter & Gamble, AT & T, Illinois Tool Works, T Rowe Price, an asset manager, 3M, Abbott Laboratories, the drugs maker, and Chubb Corporation, the insurer.
Europe produced a smaller number of striking dividend records.
Nestlé has not cut its dividend since 1959, when the payment was 0.023 francs. Its dividend last year was 2.05 francs — an 89-fold increase over a period of 53 years, which is equivalent to an average annual rise of 8.8pc. The stock is forecast to yield about 3.5pc this year.
L’Oréal and Roche have increased their dividends every year for the past quarter of a century, with compound annual growth of 15pc and 17pc respectively.
L’Oréal’s yield isn’t particularly high, with a forecast this year of just over 2pc, but the consistency of the payment “makes the company attractive to investors who are looking for a stable income”, J P Morgan said. Roche’s yield is more attractive with a 3.3pc forecast for this year, which thanks to continued growth should be more than 3.8pc in 2015.
Novo Nordisk, the Danish company that makes diabetes treatments, also has a 25-year record of paying rising dividends; Kerry Group, the Irish food ingredient producer, managed 24 years.
Handelsbanken, the Swedish bank that has a growing branch network in Britain, has cancelled the dividend only twice — in 1922 and 1992 — in the 142 years since its founding in 1871.
Alex Robins, client portfolio manager of the JP Morgan Global Dividend fund, said he was a big supporter of companies with this kind of dividend record and of indices that sought to include them.
“If we get another crisis and you have your money in these ‘dividend aristocrats’, your income shouldn’t be cut,” he said. “The flip side is that, if we get a recovery, sectors such as banking and technology are likely to rally strongly and you would miss out on that.”
He said the financial crisis had weeded out a lot of companies — including banks, technology firms, builders, car makers and their suppliers — that might previously have qualified for a dividend aristocrats index.
“The hurdles to get into these indices are now extremely high,” he said.
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