Investing in Dividends
What it involves
It is a conservative strategy focused on collecting dividends and, where applicable, on share price appreciation. The aim is to find companies with stable or growing dividend growth that is sustainable over time.
Advantages
- Periodic income without having to sell the position.
- The Dividend Growth strategy (Aristocrats and Kings) has in many periods outperformed the S&P 500 with lower volatility.
- A reasonable option for conservative profiles seeking more upside than fixed income thanks to appreciation.
Disadvantages
- The analysis is no simpler: companies must be analysed as in any other strategy.
- Smaller universe and the possibility of missing opportunities.
- Returns generally not much above the market average.
- Tax inefficient: tax is due each time a dividend is received.
- To benefit from the snowball effect it is advisable to reinvest dividends.
- With small amounts of capital and a goal of only collecting dividends, the strategy may be impractical.
Types of dividends
| Type | Description |
|---|---|
| Interim (ordinary) | The most common. Paid in cash as an advance on earnings, often in several instalments over the financial year. |
| Special dividend | Distributed from exceptional profits; not recurring. |
| Script dividend | Payment is made in shares of the company itself. Caution: in some cases it is used in a questionable way (e.g. capital increase to pay a dividend); it can be a red flag. |
Quality criteria
- Predictable, quality businesses with a solid balance sheet (low leverage).
- Buy at attractive prices when possible (higher returns from dividend and appreciation).
- Review FCF per share vs. dividend per share and the inverse relationship between share price and dividend yield.
- Key: analyse the historical payout ratio. It should be moderate and sustainable. A very high payout increases the risk of a cut, cancellation, debt issuance or capital increase.
Dividend Aristocrats and Kings
There is no Dividend Kings ETF. There are Aristocrats ETFs.
Companies that have increased the dividend consecutively for many years (“Dividend Growers & Initiators”) have in certain periods shown better returns than the market while also having lower beta and lower volatility.
Dividend Aristocrats
- They belong to the S&P 500.
- They have increased the dividend every year for at least 25 consecutive years.
- They must meet minimum market cap and liquidity requirements.
- Only about 66 companies meet these requirements.
Reference: Dividend Aristocrats – Dividend Growth Investor.
Dividend Kings
- They have increased the dividend consecutively for at least 50 years.
- There are only about 55 such companies in the U.S.; they reflect great strength (having weathered multiple recessions, energy crises, high inflation and shocks such as 9/11 or the pandemic).
Reference: Dividend Kings – Dividend Growth Investor
ETF examples (Aristocrats)
| Market | Ticker | Name |
|---|---|---|
| U.S. | NOBL | ProShares S&P 500 Dividend Aristocrats ETF |
| Europe (UCITS) | USDV | SPDR S&P US Dividend Aristocrats UCITS ETF |