The case for dividend income has become even more compelling as record-low interest rates and macroeconomic
conditions have driven bond yields down. In uncertain and choppy markets, yield-starved investors are looking for
ways to satisfy their income needs.
But what about those seeking capital growth? Investing in companies that have a history of not only paying,
but increasing, their dividends can provide both capital growth and income – as these companies have historically
outperformed the broad market over time (see chart below). A high-conviction focus on dividend growth as an
investment factor can result in higher yield than the broader market and overall growth potential from stock
Steady growth vs. current yield
A dividend grower is a company that not only pays a dividend, but has consistently increased its dividend over time.
Why does this matter to an investor? While it may seem enough to simply focus on the current dividend yield relative
to income needs, this only tells part of the story.
Companies that consistently grow their dividends tend to be those that are mature enough in the business lifecycle
to be able to pay dividends and yet still have room for continued business growth through reinvestment projects.
Dividends are certainly an important part of overall returns, but dividend growth over time demonstrates a level
of stability and growth potential that a high dividend alone doesn’t.
A high, above-market dividend payment may signal that a company is undervalued. The high yield
simply may not be sustainable during down markets, which could lead to a dividend cut and subsequent drop in share
price during tough times. It can also indicate a lack of long-term thinking if excess cash flow isn’t required for
plans to grow the business. High-conviction investing based on dividend growth as a factor can help mitigate these
issues by focusing on steady growth over current yield.
A steadily growing dividend can be an indicator of a company’s overall corporate health. Businesses
that have consistently grown their dividend over time tend to illustrate key merits of financial strength. Put another
way, the consistent increase may be a by-product of corporate health, intelligent capital allocation decisions, and
consistent earnings growth. The fact that they consistently have free cash flow available to increase the dividend
after they’ve taken care of future growth by investing in the business is a key determinant of both stability and
quality. These businesses are generally more likely to exhibit resiliency in tough economic environments.
Historically, dividend growers have traded at a higher price-to-earnings ratio (P/E)* than companies that pay
higher dividends because they tend to grow faster. However, there has been a shift in this norm, as many investors
seeking yield are making buying decisions based solely on current yield, pushing valuations for high-dividend paying
companies beyond those of the dividend growers. Investors can take advantage of this price gap by focusing on dividend
growers over simply current yield.
Dividend growers over time
The chart below shows how dividend growers have fared over the long term, both in terms of volatility and performance.
Dividend growers have not only outperformed, but have also provided a much smoother ride for investors along the
way – demonstrating that investors don’t need to choose between income and growth. Why not strive for both?
Finding dividend growers
High-conviction, active portfolio managers use a disciplined approach to researching companies, looking past
markets trends to find high-quality dividend growers at the right price.
Factor-based smart beta strategies can provide exposure to dividend growers by following an index focused on
companies that exhibit a history of increasing dividend payments, such as
the Nasdaq Select Canadian Dividend Index.
The following actively managed and factor-based, smart beta strategies recognize the importance of dividend growers:
* Price-to-earnings (P/E) ratio measures a stock’s valuation by dividing its share price by its earnings per share.
Scott Newman is Vice President, Global Investment Strategies
Team Lead, Invesco Canada.
Notes & Disclaimer
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professionals for advice on their specific circumstances before taking any action. The information contained herein
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their values change frequently and past performance may not be repeated. Please read the simplified prospectus before
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trademarks of Invesco Holding Company Limited, used under licence. © Invesco Canada Ltd., 2016