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I’ve always liked dividends – reinvested and compounded – they’ve played a big role in Isaye’s growth over the years. Much less attractive is “total return,” i.e., focusing on total income driven primarily by capital growth at the expense of income.
This can be good when stocks are performing in futures, the argument being that you can always sell a portion of your holdings if you need the money. But in a bear market, as it has recently been, depreciating capital combined with little or no income is not encouraging.
Maybe it’s my math training and self-discipline, but I’ve always distinguished between capital and income, and threshing corn is not for me. Reducing or skipping dividends always leaves a scar on a company’s record, so I like businesses I’ve invested in to at least maintain dividend value during tough times.
At the moment, very depressed markets have produced very attractive dividends and I have shifted my money heavily in my own and family portfolios to Aviva or Legal & General – to private sector “gilts”-like funds. Many strong, established and profitable small-caps are also now attracting production.
Sure, depositors may be getting returns of 6 percent or more on bank deposits following the recent rise in interest rates, but how long will these rates last? Years ago, I wrote an article on my “Double 7” approach, which advocates finding both a dividend yield and a price/earnings ratio of 7. I never thought those days would come back again!
It is against this background that I am delighted to have recently had the opportunity to advise and build a conservative income-focused portfolio for a family charity. What an exciting time to invest in dividend stocks right now.
A balanced portfolio – without over-indulgence – is something to consider. I’ve selected 16 stocks from heavyweight to large-cap, all of which offer a dividend yield of 5 percent or more. As “core” it was a three-unit holding in each of Aviva, Legal & General and M&G, all at a yield of at least 8 per cent. Then five two-part holdings – British American Tobacco, Phoenix, Primary Health Care, Secure Trust and Taylor Wimpey – again juiced up to an average of 7 percent.
The first two need little introduction; Despite the debt, PHP should be able to maintain at least a dividend in terms of rent flow as written by the government. Niche lender Secure Trust should be very cheap – I note the CEO has just made a notable purchase – and with land bank and cash-rich Taylor Wimpey, it offers a good buying opportunity when we should be at or near the bottom. House building cycle.
Finally, we bought eight small-cap single-unit holdings – all committed and consistent dividend payers: Anpario, Chesnara, Duke Royalty, MP Evans, Hollywood Bowl, STV, Workspace and VP. This group has a 6% gross yield that has significant price recovery and may be a takeover candidate from time to time.
At the above weightings, this portfolio should yield a total dividend yield of approximately 8 percent. Even if a couple of holdings disappoint, the projected earnings should still be very satisfactory, and large-cap strength will provide easy access to capital if needed to get into capital—which, fortunately, may be a long way off.
Turning to my own portfolio, the performance is mixed. Disappointing trading news hit stockbrokers Christie Group, though I believe it’s still very undervalued, and Videndum, a provider of content creation tools, continues to fall under the brunt of Hollywood attacks. Hopefully there will be a solution here soon.
On the bright side, we had encouraging optimism from competing technologies as trading recovered from supply chain delays and semiconductor shortages, an important US acquisition as it builds its defense business. I suspect that in two or three years it will be a materially more valuable and better known UK plc.
However, the most recent highlight of my investing life was a visit to Goodwin’s engineering team, which is based at a family-owned pottery. It has to be one of the best companies I’ve held stock in over 60 years as an investor.
I have never encountered family directors so driven and committed to growth. They have a unique UK capability as a key supplier of large, technically advanced castings. It is focused on the nuclear destruction and naval markets, both sectors helped to provide an increase of 68 percent last year. Approximately 25 percent of the transfer is defense-related – a vital component of the UK and US Navy’s submarine fleet and should eventually benefit from the AUCUS security agreement.
Among other activities, Goodwins is nearing production of a very high-temperature polymer resin called Duvelco. Hopefully, all this will bring huge profits in the coming years.
Lord Lee of Trafford is an active private investor and shareholder in the companies mentioned.
