I’m looking at some of the biggest and ‘safest’ dividend shares on the entire London Stock Exchange. With a stunning record of hiking dividends every year for more than 25 years, DCC, Halma, and Diageo (LSE:DGE) are incredibly popular.
Even legendary investor Warren Buffett has taken a liking, adding Diageo to his portfolio in early 2023, enjoying ample passive income ever since. So, what’s so special about these companies that’s enabled them to keep paying dividends for so long? And are they actually as ‘safe’ as they seem?
Inspecting the dividend
Despite having similar track records, each one of these companies is unique. DCC focuses on industrial support services, Halma on safety and electronic equipment, while Diageo is an old-fashioned brewing and distillery operation.
There’s obviously not a lot of overlap across these enterprises. Yet despite that, they still share some common traits. Most notable is the presence of pricing power. Let’s zoom into Diageo.
The company owns a vast portfolio of over 200 brands, including globally recognised ones like Johnnie Walker, Guinness, and Smirnoff. This branding and reputation that’s been cultivated over decades has translated into steadily rising demand across the planet. And apart from expanding its addressable market, it grants Diageo the ability to charge a premium.
Alcohol isn’t likely to go out of fashion any time soon. And with drinkers often being loyal to their favourite brands, the firm has been able to fairly consistently increase revenue and profits, funding an ever-increasing dividend.
The threat of disruption
Seeing a company maintain and expand dividends for decades is often perceived as a sign of safety by investors. That’s why Dividend Aristocrats are so popular despite most offering lower yields. However, no investment is ever risk-free. And shareholders of Diageo, including Warren Buffet, are being reminded of that this year.
For the first time since the pandemic kicked off, Diageo has just posted a decline in sales. Almost every category suffered a decline in volume that higher prices weren’t able to fully offset. Latin America and the Caribbean were two regions in particular that were hit hard, with a 21.1% drop in sales on the back of inventory destocking.
Until recently, the firm was being steered by Ivan Menezes. However, following his untimely death in 2023, Debra Crew took over the corner office. And so far, her tenure has been off to a pretty rough start with these rising issues and a profit warning.
This may just be unfortunate timing. And Diageo does have a track record of bouncing back from economic downturns. However, this may also be an early indicator that the new leadership isn’t filling Menezes’ shoes.
What does this mean for the dividend?
Despite the troubles facing Diageo, dividends continue to rise with another 5% boost recently announced. However, considering the share price has also tumbled by almost 30% over the last year, Crew has a lot of convincing to do that she can turn things around. Nevertheless, this goes to show that even the safest-looking income stocks aren’t always stellar investments. I’m not buying.
