Investing in UK dividend shares is one of my favourite passive income ideas. But while I like shares that pay out dividends, I especially like those that grow their payouts each year. Scientific instrument maker Judges Scientific (LSE: JDG) is such a company, with a run of double-digit dividend increases in recent years.
Here’s why I would still consider Judges Scientific as shares to buy now for my portfolio, even at the current share price.
Warren Buffett style capital allocation
Investor Warren Buffett has said before that one of his biggest skills is capital allocation. Why does that matter so much?
Let’s say an investor has £1,000. If he allocates it to a bond paying 2%, after one year he’ll have £1,020. But if he allocates it to a share yielding 8% – like British American Tobacco – after one year he’ll have £1,080. Over time, due to compound interest, the difference will be even more pronounced. But a share typically carries more risk than a high-quality government bond, so it’s possible the shares will have lost value (as happened when Buffett invested a few years ago in Tesco). So, allocating capital matters because it makes the difference between high returns, low returns, and negative returns.
Like Buffett, Judges focuses a lot of attention on capital allocation. Like Buffett, it has a disciplined approach to criteria for acquiring businesses. It focuses on getting the right quality of business and not overpaying for it. By not overpaying during the acquisition stage, Judges can make such purchases far more profitable than they otherwise would be.
Shares to buy now for dividend growth potential
Judges diverges from Buffett’s philosophy when it comes to dividends. Not only does it pay a dividend, it has an excellent record of raising the payouts each year. This past year, for example, the company grew the dividend by 10%. That’s actually low by the company’s standards: for the prior two years in a row it had hiked its dividend by 25% annually.
How can the company achieve such market beating dividend raises? That’s where its smart capital allocation policy comes in, in my view. By buying high-quality companies at attractive prices, it is able to generate substantial cashflows. Its focus on scientific instruments means that its customer base is willing to pay for quality, as accuracy matters. So Judges has pricing power, which enables it to grow profits. Earnings per share last year came in at £1.31. The dividend of 55p was therefore well covered and I consider Judges as shares to buy now for my portfolio.
Can Judges Scientific keep raising its dividend?
That coverage suggests that Judges has room to keep growing its dividend in double digits if it so chooses. But the popularity of the shares means that the dividend yield is currently only 0.7%. So even with double-digit raises, the yield may lag the FTSE 100 average.
Added to that are risks to the shares. At a price-to-earnings ratio of 43, they clearly have high investor expectations built in. Risks include the negative sales impact of Judges’ staff not being able to travel to some markets to install instruments, and the risk that sustained lab shutdowns may delay some customers’ need to replace equipment. Both could hurt Judges’ revenue and profits.