One of the many things I love about dividend-paying stocks is that the best pay income of up to 6% and 7% a year at a time when the average savings account pays just 0.4%. This makes them one of the few investments to protect your savings from inflation, now standing at 2.6% in the year to June.
They don’t just give you an inflation-busting income, they allow you to lock into a rising income stream as well, because most companies aim to increase their dividend year after year. New research from AJ Bell shows that an impressive 27 companies on the FTSE 100 have increased their dividend every year for the past 10 years, while two have increased their dividend for more than 30 years.
The first of these is a global investment trust called Scottish Mortgage (LSE: SMT), launched in 1909, which has hiked its dividend every year for the past 34 years. I am a long-standing fan of this fund behemoth, which now has more than £5.5bn of funds under management. And it isn’t hard to see why, given that it has delivered a total return of 225% over the past five years alone, more than double the 101% return on its global equity benchmark, according to Trustnet.com. It is up an incredible 42% over the past year alone.
The Scottish play
Better still, Scottish Mortgage has thrashed the market while offering bargain basement charges, totalling just 0.45% a year. In March, it deservedly became only the fourth investment trust ever to ascend to the FTSE 100. It has benefitted greatly from its strong US bias, with almost half the fund invested in US equities, plus 20% in each of the eurozone and China. Top 10 holdings include Amazon, Tesla, Alibaba, Facebook, Google owner Alphabet and Ferrari. Investors who already feel they have too much US exposure may want to look elsewhere.
Oddly, its prime weakness is the yield, currently a meagre 0.75%. However, that partly reflects its stunning share price growth. One thing is for sure, further progression looks baked-in.
The second-best long-running dividend payer was a surprise to me. The last time I looked at platinum and speciality chemicals producer Johnson Matthey (LSE: JMAT) was in September 2013, almost four years ago, when I thought it looked attractive but a little pricey. The dividends have kept rolling since then, with the company increasing its payout every year for the last 31 years, according to AJ Bell.
The downside is that share price growth has been disappointing, with the stock down 10% in the past year. Few investors will be overly excited by the current starting yield, which is 2.63%, although as we know this could continue rising for decades.
Last month, Johnson Matthey posted solid full-year sales and profits growth, with profit before tax up 19%, helped by a big currency booster. Yet investors were disappointed with yield progression, with the dividend up ‘only’ 5%. Brokers were also disappointed to see no special dividend. That is what happens when you set yourself a high benchmark. However, trading at just 13.63 times earnings, now could be a good entry point to those who have long-term faith in the power of dividend progression.