Dividends are a distribution of earnings to its shareholders says the theory.
Think of dividends as eating the fruits. Pluck too many and the tree withers. More trees die of a lack of cash than a lack of profits so paying dividends is something to be carefully considered. It’s also true that when dividends are cut the business is usually punished. It can lead to large falls in the share price and some people will abandon the share (in disgust) when dividends are cut or cancelled. Just look at I3 Energy - the share halved in price, when they halved the dividend. It’s the same business just fewer fruits being taken. Today they announced cost cutting and record profits which, considering they’ve been affected by Canadian Wildfires and lower oil and gas prices, is a superb result, and the share jumped 9%.
a/ So one view is to think about trees laden with fruit. Plant those in your portfolio.
b/ Another is to think about trees capable of growing fruit but have been abandoned due to a single poor harvest. Value plays.
c/ Another is to think about growing trees which can sustainably provide greater and greater harvests - i.e. dividends grow.
d/ Another is to look at trees on the cusp of producing harvests - but don’t yet - but plan to.
Here’s a couple of ideas how to do this. I’ll mention some of my holdings to illustrate these ideas.
Search for the highest yield. I like using Dividend Data for this. This link takes you straight there: https://dividenddata.co.uk/investment-trust-dividend-yields.py?&sort=yield&order=1
This allows you to see the highest dividend downwards for the FTSE350, ITs (Investment Trusts) and ETFs… but watch out! Ones in red are either cut or being cut. Now I can tell you FAIR was cut from 2.5c to 2c which is why it’s red. That sounds awful doesn’t it? So what if I tell you 2c x 4 times a year on a 53c stock is a 15% yield. They are buying back shares daily so this is one of my favourite holdings. I do also like SDIP on the ETFs because the underlying shares are all manner of holdings from around the world - Oil, Banking - I’d suggest you don’t hold these already so potentially a good diversifier and a 13.45% yield too. Another top tip is to use the AIC. If you want to invest in Japanese ITs you can find the one with the highest yield by clicking on the yield column to sort each section:
https://www.theaic.co.uk/aic/find-compare-investment-companies/advanced-compare
A third would be Trading View. You can search on forward yield not just historical yield.
https://www.tradingview.com/markets/stocks-united-kingdom/market-movers-high-dividend/
Dividends in the future may not be the same as in the past which leads me on to the the next idea type Dividend Cuts.
Dividend cuts are value plays. Not ever read this elsewhere so this is Oak Bloke original thinking. Apart from looking at the red entries on dividenddata.co.uk and reading the daily RNSs you can also use: https://dividenddata.co.uk/dividend-cuts.py?market=alldividends to track cuts. When a stock cuts it usually falls - for there to be an opportunity you need to ask yourself a crucial question. Why did they cut? If the reason why they cut was a change to the business then how permanent is that? Often the over reaction to a cut is an opportunity but only if you’re not catching a falling knife. That means you buy something for it to fall further. I3Energy for example, there’d been no change to the business, the amount of oil, leadership or anything else. Just they’d tightened their belts because of oil prices falling, and they reduced their investment plan too. They also moved from monthly to quarterly dividends. So one way or another upset enough people that it went from 22p to 11p. Today it’s above 13p again.
Highest Growth: Unfortunately this link only works on FTSE350 stocks but you might not otherwise have known Ashtead Group had grown 33.5% over the past 10 years. If you want a bit of stodge then growing stodge is better than stodgy stodge. Not my cup of tea but a good way to find investment ideas.
https://dividenddata.co.uk/ftse-dividend-history.py?market=ftse100&sort=cagr10&order=1
Look in strange places. Who’d have thought SDIP, a global dividend ETF, would yield 13.45%? Who would think Aircraft Leasing can yield more than 13.45%? Who would think that AIM dividend aristocrats have much more cover than the FTSE100.
Protection. Some dividends come with the magic words “inflation protection”. TENT, for example, has 90% cover yet trades on a whacking 41% discount despite offering a 9.1% yield which is fully covered by earnings.
https://www.edisongroup.com/research/pitching-tent-a-diversified-energy-transition-story/32244/
It’s in the tea leaves. I am a recent convert to TENT’s stable mate DGI9. 12% yield and this time it’s not fully covered - but is on track to become fully covered. Quite difficult to spot this - just takes several hours of reading and research. I’ll be covering DGI9 in a future post.
The power of compounding. A 10% yield paid quarterly (2.5% a quarter) if you reinvest it will double your money in 7 years. The beauty of dividends is that in a flat market you still get a return!
Here’s the maths:
A=P×(1+nr)nt
Where:
A is the final amount
P is the initial principal (the amount you start with)
r is the annual interest rate (decimal form, so 2.5% becomes 0.025)
n is the number of times the interest is compounded per year (quarterly compounding means =4n=4)
t is the number of years
Here’s another thought. You can be penniless. If you can invest £1000 a month every month and earn 2.5% per quarter (10% per annum) and you reinvest your dividends (compounded earnings) then in 26 years and 3 months you will be a millionaire. Assuming zero share price growth. If you get 5% annual growth on that investment that drops to 24 years. This is essentially what Warren Buffett has done (over 60 years). Rerunning the numbers after 60 years of investing £1,000 per month with a 15% annual return and reinvesting the earnings, you would have over £241 million!
Final thought ALWAYS ALWAYS ALWAYS check the EPS (earnings per share) and the DPS (dividends per share). Typically these will be in pence or cents. Or maybe Euros. If you divide EPS/DPS then you get a number greater or less than 1 (or 1 I suppose). Above one and you’re not picking all the fruit. Below and the fruit is being stripped off the tree faster than you can grow it. This is what’s called dividend cover. DGI9 is below 1 but I know the future tree will grow more fruit than it does now and there’s a barrel of fruit (cash) which they’re dipping into to pay dividends. Just be careful to check this and know why you’re investing if it’s below 1 - or not much above 1 - always good to have some cushion.
Anyway you’re probably fed up with my tree and fruit analogy by now. But I hope these tips have given you some food for thought. Another slice of advice coming soon.