UK inflation hit a new 40-year high of 9.4% in June. That followed a 9.1% rise in May. In light of this, stocks have been extremely volatile the past year or so, which has increased many dividend yields to attractive levels. But companies could cut or suspend these high-yield dividends to preserve capital during an economic downturn. So my focus has been centred around finding stocks with lower-yielding dividends, but ones which are reliable and resilient, growing their payouts above the current 9% rate of inflation.
To me, one UK dividend stock stands out from the crowd – one that’s delivered 48 consecutive years of annual dividend increases to its shareholders!
Safety in numbers
The Scottish American Investment Company (LSE:SAIN) is an investment trust run by Scottish investment house Baillie Gifford. Its objective is to grow its dividend at a faster rate than inflation through increasing capital and growing income. The £872m trust has delivered a total return of 65% over the past five years and has a dividend yield of 2.7%.
The vast majority of its assets are in global shares, though income is also received from bonds, property, infrastructure and other asset types. The portfolio contains around 65 companies, including household names such as Microsoft and PepsiCo. Its largest holding is Novo Nordisk, the Danish pharmaceutical giant, which currently makes up 3.5% of assets.
I like the safety such diversity provides, not just in terms of different companies but also different assets. More than this, though, I like the trust’s remarkable record of raising dividends above the rate of inflation.
There have been no dividend reductions by The Scottish American Investment Company in the past 80 years. During this time, there has been World War II, the Suez and Cuban Missile crises, multiple recessions and bubbles, various periods of high inflation, and now even a global pandemic. This level of resilience was again proven in 2020 when, despite a collapse in global dividends brought about by Covid-19, the trust was able to increase payments to its shareholders by 1%.
In its most recent update, the trust declared a second interim dividend of 3.40p per share. This is 10.6% higher than the equivalent dividend paid last year, which provides shareholders with income above the UK’s current 9% rate of inflation.
That being said, a dividend yield of 2.7% doesn’t sound that sexy compared to some of the higher yields out there in the market right now. For example, the BP dividend yield – even after a very strong increase in the share price over the past year – currently stands at 4.25%. So there is a risk of opportunity cost here, where I’m sacrificing potentially much higher yields elsewhere for the safety and resilience of the dividend paid by The Scottish American Investment Company.
However, I’m happy to sacrifice those higher yields in favour of investing in a trust that has delivered nearly half a century of rising dividends.