QUALIPORT
Enjoying Quality Dividends

By Maynard Paton (TMFMayn)
June 7, 2005

Dividends can make all the difference over the long term. According to the Barclays Capital 2005 Equity Gilt Study, £100 invested in shares at the end of 1899 would now be worth £18,875 with dividends reinvested (adjusted for inflation). Had the payouts been spent instead, the £100 would be worth just £170 (adjusted for inflation).

Given that striking difference in returns, it's no surprise to find liberal dividend-paying companies have generally out-performed over time. Indeed, the FTSE 350 High Yield index has consistently outrun the main 350 index and its Low Yield counterpart over one-, five- and ten-year periods. Read more.

However, despite all the market statistics -- and the portfolio not receiving any regular cash injections -- the Qualiport collects relatively little in the way of dividends.

Total payout

Based on the latest full-year dividend for each holding, the table below shows the annual sum the Qualiport currently enjoys:

Company	Shares	Dividend per share (p)	Qualiport collects (£)
Associated British Ports (LSE: ABP)	681	16	108.96
Emap (LSE: EMA)	372	24.9	92.63
Halma (LSE: HLMA)	1,920	6.19	118.85
Johnston Press (LSE: JPR)	1,608	7.2	115.78
London Stock Exchange (LSE: LSE)	2,018	7	141.26
Total			577.47

Set against a portfolio value of around £27,200 (a full breakdown is shown at the end of this article), the Qualiport's historic dividend yield comes in at 2.1% -- not brilliant when the overall stock market presently offers 3.3%.

But the headline yield is not the be all and end all of a portfolio's relationship with dividends. There are another five points to consider:

1) Original cost: The Qualiport did not buy its current holdings at today's prices:

Company	Shares	Average buy price (p)	Original cost (£)
Associated British Ports (LSE: ABP)	681	416	2,833
Emap (LSE: EMA)	372	797	2,965
Halma (LSE: HLMA)	1,920	111	2,138
Johnston Press (LSE: JPR)	1,608	269	4,322
London Stock Exchange (LSE: LSE)	2,018	336	7,724
Total			19,982

So, on an original-cost basis, the portfolio's yield is bumped up to a more reasonable 2.9% (£577 / £19,982).

However, that's still below the present 3.3% market yield. What's more, it's less than the 3.4% yield available to anybody buying an average basket of shares during the past three years.

2) Special dividends: The Qualiport occasionally benefits from one-off dividends. For instance, the London Stock Exchange distributed a special 55p dividend last year, equivalent to £1,071 and a massive 185% of the current rate of portfolio payouts. In addition, former portfolio holding DFS Furniture paid the Qualiport a special dividend in 2002.

3) Buybacks: There are share buybacks to consider as well, which represent money returned to shareholders in a roundabout way. Within the Qualiport, Associated British Ports has been a notable buyer of its shares. In 2004, the group spent £90m on buying back its own capital, compared to distributing £50m in the way of dividends.

(Had ABP's £90m buyback expenditure been distributed as part of its ordinary dividend instead, the Qualiport would have received an extra £196, taking its yield to over 2.8%.)

4) Dividend cover: The Qualiport's low yield stems largely from having nearly two-thirds of the portfolio being invested in Johnston Press and the London Stock Exchange, both of which offer historic yields of about 1.4-1.5%.

However, dividend cover at both these firms is high. At the London Stock Exchange, the most recent full-year payout was covered three times by earnings; at Johnston Press, cover was five times. Even if profits stagnate, both payouts are still likely to rise. Indeed, both firms choose to retain the vast majority of their earnings to drive dividends much higher...

5) Dividend growth: Using current City forecasts, the following table highlights what the Qualiport could be receiving in dividends over the next year or two:

Company	Current year dividend (p)	Current year payment (£)	Year after dividend (p)	Year after payment (£)
Associated British Ports (LSE: ABP)	16.5	112.37	17.1	116.45
Emap (LSE: EMA)	26.6	98.95	29	107.88
Halma (LSE: HLMA)	6.55	125.76	6.92	132.86
Johnston Press (LSE: JPR)	8.06	129.60	9.2	147.94
London Stock Exchange (LSE: LSE)	8.45	170.52	9.17	185.05
Total		637.20		690.18

The prospect of a £637 aggregate payout in the current year equates to 10% growth in the portfolio's overall dividend. A further 8% improvement is forecast to take the total payout to £690 the year after.

Summary

Though important, today's company dividends are just one part of the general investment equation. What counts long term are durable competitive advantages, reliable cash generation and the effective use of retained earnings -- business traits that will dictate payout levels well into the future. It's one thing to collect plenty of dividends and reinvest them, but investors still need to plough their payouts back into solid, dependable businesses to obtain good portfolio results.

Furthermore, investors should be able to accept relatively low dividends today if cash is being returned by other means and/or there is genuine prospect of superior payouts tomorrow. In terms of the Qualiport, the occasional special payout and buyback is encountered while portfolio dividend growth of about 9% per annum is expected this year and next. All that should provide a useful boost to the Qualiport's performance in the years to come, despite the portfolio's small-ish immediate yield.

More: Fool's Guide To Dividends | Ten Facts About Britain's Booming Dividends

Maynard owns shares in Associated British Ports, Halma, Johnston Press and London Stock Exchange.

Portfolio value

Holding	Number of shares	Closing price 06/06/05 (p)	Value (£)
Associated British Ports	681	484.5	3,299.45
Emap	372	802.5	2,985.30
Halma	1,920	146.5	2,812.80
Johnston Press	1,608	489.5	7,871.16
London Stock Exchange	2,018	477.5	9,888.20
Cash			345.54
Total			27,702.45