Today, I’m going to look at dividends in a different way. I’m going on the hunt for a group of sound companies, doing their business in different sectors and paying their shareholders growing dividends along the way. I’ve set a couple of rules to assist:
- The company must have paid out growing cash dividends constantly, at least over the past 5 years;
- The company must be a ‘liquid’ stock – we don’t want to see any eye-watering bid/offer spreads here;
- The company must have a sound balance sheet. I’m looking for a current ratio (the ratio of Total Current Assets divided by Total Current Liabilities for the same period) of 1.5.
In short, I’m looking for a quality, liquid company that I can rely on to keep the cash flowing into my ISA – lets have a look what I’ve found:
Some readers may think that I’m losing the plot with my first choice, but ARM Holdings (LSE: ARM), though yielding less than 1%, has grown its dividend at a compound annual growth rate (CAGR) of 23.2% and is comfortably covered by earnings. It has a healthy current ratio of: 3.35 and has increased the dividend over the last 9 years. To me this demonstrates a willingness to return cash to shareholders, augmented by potential capital growth over the long term — remember, this company is still growing strongly.
FTSE 250 company Victrex (LSE: VCT) may not be on most people’s radar. It is engaged in providing polymer solutions: it provides its PEEK products to aerospace, automotive, electronics, energy, medical and other industries. With a forward yield of just under 3%, it may not be considered as a dividend play; however, this could be a mistake. The company has paid a growing dividend over the last nine years and sometimes pays a special dividend, as it did for the last reported year. Again, we have a strong company boasting a current ratio of 4.60 and no debt — well worth considering for long-term holders.
After the fallout from the failed Abbvie takeover, Shire (LSE: SHP) has regained its composure, recently hitting new highs — although this means that it currently yields less than 1%. Having said that, the company has a nine-year dividend growth streak, having grown the dividend at a CAGR of 15.5% — this is expected to continue into the future. Indeed, if the company can continue to grow, then there will be capital appreciation included in the package. The company comfortably meets the balance sheet strength test, with a current ratio of 1.72, and is firmly on my watchlist.
Broker IG Group Holdings (LSE: IGG) is based in the United Kingdom and provides retail traders with access to the financial markets. The highest yielding of the companies under review today, IG Group has a forward yield of 4.35%, and the lowest P/E of under 17 times forward earnings. Even so, we have seen this company pay a rising dividend over the last eight years. Combine that with a current ratio of 5.99 and you have a company with the ability to continue growing the dividend over time.
Which Strategy To Choose?
It could be argued that selecting a basket of stocks with higher yields will provide greater returns. For some, this may be the correct course of action, but for those with a longer time horizon, let me show you this example:
We have two companies:
- Company A — its shares trade at 200 pence per share and it pays a dividend of 5 pence per share. Every year, it grows its dividend by 20%;
- Company B — its shares trade at 200 pence per share and it pays a dividend of 10 pence per share. Every year it grows its dividend by 10%
Clearly, in this example, company B has the higher yield — but after eight years, company A would be paying a higher dividend of 21.5 pence per share vs company B, paying 21.44 pence per share. After 10 years, the gap widens further, with company A now paying a dividend of 30.96 pence vs 25.94 pence for company B.
The moral of the story is this: don’t be put off by a share with a lower yield if it is growing strongly, as this can often be the case with growth companies. Given time, they can become the high yielders of tomorrow…
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Dave Sullivan owns shares in Victrex. The Motley Fool UK has recommended ARM Holdings and Victrex. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.