Last week we left off noting that in 2011 the dividend payout by UK listed companies increased by 26 per cent to a record £68 billion. To my mind it is a conspicuously incongruous, and reassuring, number in the midst of all the doom and gloom. One could argue that it might reflect a lack of opportunity to deploy capital for growth, but it might also reflect a solid cash position even post dividend, a sober attitude towards investing and an enlightened attitude towards shareholders. In any case, in the first instance excess cash is surely a problem worth having – it is better to have it and be in a position to have to decide what to do with it.
The general risk aversion which has accompanied the financial crisis resulted in equities being sold off. Equities are, after all, a riskier asset class and it is understandable that they are sacrificed in a flight to quality. This only served to increase the dividend yields on offer.
This begs the question – has the negative attitude towards equities as a class been overdone, and are there any companies out there which offer attractive income potential? To help answer that question, we have conducted a search for high dividend paying stocks, with the following selection criteria:
A historic and sustainable dividend yield of at least four per cent. Historic yields of three per cent, which appear capable of breaching four per cent in the short term, are also considered. We eliminate companies which are overtly expensive, even if they clear the dividend hurdle.
The company has to be reasonably easy to understand, such that one can independently form an understanding of the opportunities and risks. This eliminates complex companies/industries of a technical nature, where specialist knowledge is required.
The industry has to be run by leaders who are sane, rational and risk conscious. This eliminates the banking sector, which appears to have lost sight of its primary purpose.
We eliminate serial empire builders who appear more interested in growing the size of the business than growing shareholder value, and translating that into dividends.
We favour companies which are not exclusively exposed to eurozone domestic demand which we are not alone in thinking will lag the rest of the world and is subject to substantial systemic risk. We make an exception for utility type companies.
We apply no geographic filter, except that we eliminate listings in markets where the governance regime is clearly opaque or suspect.
We eliminate shares in companies which are typically illiquid. This eliminates, amongst others, local shares.
We eliminate any company that looks good on paper, but for some reason (possibly intangible) we do not feel comfortable about it, its management or the space in which it operates. This reflects our belief that there is much more to investing than reducing it to a sanitised exercise in mere mathematics.
It should be noted that our filters will result in companies which would not necessarily be the top pick in their sector. The top pick may well be one which has the most growth potential – but for the purposes of this exercise we are interested in instant gratification in the form of a beefy dividend now, more than the potential for future capital gains. On this particular issue we are prepared to compromise only to the extent as stated in our first point. Also, a top down asset allocation strategy may favour different sectors.
The resulting selection we highlight (box above) will be put on our watchlist, and their progress monitored to aid in familiarisation.
This article is the objective and independent opinion of the author. The information contained in the article is based on public information. Curmi and Partners Ltd. is a member of the Malta Stock Exchange and is licensed by the MFSA to conduct investment services business.
www.curmiandpartners.com
Mr Webster is head of equity research at Curmi and Partners Ltd.