Do you like dividends? I do. And I thought it would be instructive to see which are the three top-yielding stocks in my portfolio. It was quite a surprise.
First off, all three are currently yielding over 6.5%. That’s a remarkable rate of return that thrashes any kind of interest you can earn on cash. If those companies just maintain their payouts — dividend per share — at the current level, and their share prices don’t move, then I’ll double my money in 10 years just by re-investing dividends. It’s no wonder Albert Einstein called compound interest — which is what makes dividend re-investment so rewarding — the eighth wonder of the world.
Secondly, two of the three companies happen to be the two biggest companies on the London stock exchange: HSBC (LSE: HSBA) (NYSE: HSBC.US) and Shell (LSE: RDSB) (NYSE: RDS-B.US). Many sophisticated investors eschew large caps. Renowned investment guru Jim Slater summed it up: “Elephants don’t gallop”. Well, it’s true that large companies can’t grow as fast as small caps might, but with dividend re-investment, the size of your own holding can. So I’m not size-ist, but rather see market capitalisation as one way of diversifying my portfolio. The third company of the trio, property company NewRiver Retail (LSE: NRR), has a market cap of just £372m: one three hundredth of HSBC’s.
If you’re investing for dividends you want to know that the payout is safe and sustainable, and also that the share price will progress. There’s no point losing in capital what you earn in dividends. This is where stock-picking comes in.
Shell is the crème-de-la-crème of reliable dividend payers: it hasn’t cut the payout since the Second World War. The fall in oil prices has taken its toll on Shell’s stock, which is down about 12% since last July. I’ve seen this as a buying opportunity.
Shell is certainly capable of surviving a low oil-price environment. Apart from cutting operating costs and capital expenditure it’s selling non-core assets, whilst its low net gearing — just 14% — gives it fall-back capacity to borrow to supplement its prodigious cash flow. Sure, oil could fall further, but it’s more likely than not that prices will rise again in the long term.
HSBC’s shares are back where they were three years ago, and down 25% from their highs in 2013. Investors are right to be wary of banks. Bankers remain Public Enemy Number 1, and the scandal over HSBC’s Swiss banking operations have tarnished its image. HSBC has reduced its long-term financial targets, citing the huge cost of regulatory compliance and capital requirements.
That may curtail dividend growth somewhat, but a near 7% yield isn’t a bad starting point! The bank came through the last financial crisis relatively unscathed, and its scale and geographic spread add to its security.
Value, not glamour
NewRiver Retail is a niche REIT that specialises in refurbishing down-and-out shopping centres in second-tier towns. You won’t find any prestige developments in its portfolio; what you will find are shopping centres in places like Grimsby and Romford, filled by tenants such as Poundland, Primark and Superdrug. Glamorous it isn’t, but those retail names demonstrate how you can make money at the value end of the market.
Property companies thrive by being clever. NewRiver started buying in 2009 when confidence and prices were rock-bottom. It refurbishes and restructures leases to bring in anchor tenants like supermarkets to increase footfall, and it leverages institutional capital through joint-ventures. In 2013 it bought 200 pubs from Marstons, which it is converting into convenience stores.
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Tony Reading owns shares in HSBC, Shell and NewRiver Retail. The Motley Fool UK has recommended HSBC Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.