QUALIPORT
Collecting Quality Dividends

By Maynard Paton (TMFMayn)
October 9, 2003

Dividends are important to long-term investors. According to Credit Suisse First Boston's 2003 Equity-Gilt Study, £100 invested in shares in 1918 would now be worth around £34,000 with dividends reinvested. Had the payouts been spent instead, the £100 would be worth just £1,000.

Dividend payments are significant to the Qualiport, not least because the portfolio no longer benefits from regular cash injections. On this point, it's worth emphasising the performance of a publicly run portfolio must be transparent. By not adding cash, calculating annual returns and making comparisons with alternative investments remain straightforward. Though this artificial restriction prompts more portfolio 'switching' than would otherwise be the case, the transparency pro outweighs the cons.

Total payout

Based on the latest full-year dividend, the table below shows the annual sum the Qualiport currently collects in dividends.

Share                     Number of     Dividend      Dividend
                           shares       per share     payment
                                          (p)           (£)

Carpetright                  425        37.0          157.25
Halma                      1,920         5.812        111.59
Johnston Press             1,608         5.6           90.05
Emap                         372        21.6           80.35
London Stock Exchange      1,265         4.3           54.40
DFS Furniture                236        22.7           53.57

Total                                                 547.21

Set against a portfolio value of around £21,900, the Qualiport's historic yield comes to 2.5% -- not brilliant, given the FTSE 100 presently offers around 3.3%.

The relatively low yield comes from having more than half of the portfolio invested in Johnston Press (LSE: JPR) and London Stock Exchange (LSE: LSE), both of which offer historic yields of about 1.3%. Bearing in mind dealing costs, stamp duty and spreads, the aggregate level of dividend payments suggests that a reinvestment could be made every twelve to eighteen months.

Original cost

Of course, there are other factors to consider when appraising portfolio dividends and yields. For a start, it's not as if the Qualiport bought at today's prices:

Share                    Number of     Average       Original
                          shares      buy price        cost 
                                         (p)           (£)

Johnston Press             1,608        268.80       4,322.25
London Stock Exchange      1,265        324.80       4,108.67
Emap                         372        796.94       2,964.60
Carpetright                  425        562.74       2,391.66
Halma                      1,920        111.33       2,137.56
DFS Furniture                236        466.64       1,101.28

Total                                               17,026.02

So, on an original-cost basis, the portfolio yield comes to 3.2% (£547.21 / £17,026.02). That's in line with anybody buying the FTSE 100 throughout 2002 and 2003, who'd now be receiving, on average, a 3.3% yield on their original investment. Overall, the Qualiport has bought an 'ordinary' yield in recent years, though subsequent capital growth now masks this fact.

Another issue to consider when evaluating the Qualiport's dividends is the special payout. For instance, DFS Furniture (LSE: DFS) has been a frequent distributor of one-off dividends. There are share buybacks as well, which represent money going to shareholders in a roundabout way. Carpetright (LSE: CPR) has been a notable buyer of its shares of late.

You could argue that some Qualiport members ought to be a bit more generous with their dividend policies, too. Though extremely cash generative, the London Stock Exchange has a dividend cover of about four times. Rather than dish its profits out, the LSE prefers build a war chest, which stood at £211m (72p per share) at the end of March.

Growth

However, the major feature to appreciate about portfolio dividends is growth. On balance, investors can accept a relatively low yield today if there is the genuine prospect of superior payouts in the future. Using current broker forecasts, the next table highlights what the Qualiport could be receiving over the next year or two:

Share                     Current Year             Year After

                     Dividend     Dividend    Dividend      Dividend
                     per share    payment     per share     payment
                        (p)         (£)         (p)           (£)

Carpetright            40.5       172.13       43.8         186.15
Halma                   6.25      120.00        6.66        127.87
Johnston Press          5.94       95.52        6.35        102.11
Emap                   22.6        84.07       23.6          87.79
London Stock Exchange   4.7        59.46        5.3          67.05
DFS Furniture          23.7        55.93       25.5          60.18

Total                             587.10                    631.15

Thus, the prospect of a £587.10 aggregate payout next year equates to 7.3% growth in the portfolio's overall dividend. The year after, a further 7.5% improvement is forecast to take the total payout to £631.15. Even with the upbeat forecasts, though, the Qualiport's prospective yield two years out still comes to a low-ish 2.9%.

Though important, dividends remain just one part of the long-term investment equation. The other -- retained earnings -- must also be put to good use in order to generate excellent portfolio results. Good results from long-term dividend reinvesting obviously requires ploughing back payouts into good long-term businesses. The Qualiport's holdings all have the ability to produce superior returns on equity in the years to come, and their combined payouts should provide a useful boost to the portfolio's performance.

More: Fool's Guide To Dividends | Dividends Are Still Increasing.

The author owns shares in Carpetright, DFS Furniture, Halma, Johnston Press and London Stock Exchange.