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Even Aim's dividends outpace savings rates

Published: 12:25 30 Oct 2017 GMT

Elephant with balloon attached

When we last looked at the “Aim sustainable dividends” portfolio we were anticipating an interest rate rise from the Bank of England.

We’re still waiting.

That could all change on Thursday when the Bank of England's monetary policy committee meets. The bank's governor, Mark Carney, has dropped some heavy hints that a rate rise could be in the offing.

Some are even arguing that even if the Monetary Policy Committee do not want to raise rates, they have cried wolf so often that they might do so, just to keep what remains of their credibility intact.

If Carney & co pull the trigger, it will be the first rate rise since July 2007, when the benchmark interest rate stood at 5.75%, consumer price inflation (CPI) was 4.4% and real wage growth (wage growth minus CPI) was 0.1%.

The current interest rate is 0.25%, CPI inflation is 2.9% and real wage growth is negative, at -0.8%.

Even if the bank doubles, or even triples the rate, no one is going to get excited at a return of less than 1%. Meanwhile, the 10-year gilt (government bond) is yielding 1.34%, which is slightly better but still not enough to get income seekers salivating.

The recent report from Capita Asset Services on dividend payments underscored the belief that dividends are still the way to go for investors seeking inflation-busting income.

READ Generosity of mining companies driving dividend payments towards annual record

Sure, property might be a better bet – house price inflation is running at about 5.1% - but it has numerous drawbacks, such as tying up a lot of capital that would take a long time to get at.

There is no shortage of evidence suggesting that focusing on dividend stocks (and reinvesting the dividends in those dividend stocks) is the way to outperform the market, and much of that evidence suggests that the stocks to focus on are the FTSE 350 constituents, as these are best placed to ride out storms and carry on paying dividends (worst “Carry on” film ever, starring Lord Sucre and Sir Richard Brainstorm).

Are there any growth companies paying sustainable and increasing dividends?

Some might find that approach a tad on the boring side, as the perception is that FTSE 350 companies do not offer much in the way of exciting capital appreciation.

The perception may not be the reality; seven of the FTSE 100 have risen by more than 50% over the last 12 months.

Nevertheless, if your appetite tends more towards growth stocks, then back at the end of March of this year we did a trawl through Aim stocks that are reliable dividend payers.

READ Taking AIM at sustainable dividends

The portfolio started with a nominal £10,000 to invest, with the intention of ploughing £1,000 into companies that met the investment criteria (most of which are detailed here).

Those criteria may have been too demanding, because we only found four stocks that hit the mark: Dillistone Group PLC (LON:DSG); Somero Enterprises Inc (LON:SOM); James Halstead PLC (LON:JHD); Zytronic PLC (LON:ZYT).

The first two were ejected after they ceased to come up to snuff, and one other stock – Miton Group PLC (LON:MGR) – has since joined.

That means the portfolio only has £3,000 invested, but that £3,000 is now worth £3,087 (including dividends of £44 and after deducting transaction costs of £105), up 2.9%. Over the same period, the FTSE 100 is up 1.5%.

Adding in the £7,000 of cash dilutes the performance of the portfolio, of course; if we include the cash, the portfolio is worth £10,027, which is a rise of just 0.27%.

It’s only to fair to observe that even on an annualised basis that rise would only be 0.46%, which is quite probably less than the Bank of England’s reference interest rate will be when Friday rolls around.

Our old bêtes noires, dealing costs, have vampired away most of the gains.

A new addition to the portfolio is, appropriately enough, a wealth management specialist

The good news is that a potential new addition to the portfolio has popped up on the radar: Brooks Macdonald Group plc (LON:BRK).

It’s a company that offers investment services to private high-net-worth individuals, pension funds, institutions and trusts.

The projected dividend yield for the current financial year is 2.4%, while the projected dividend is covered 2.7 times by forecast earnings and 3.2 times by historic free cash flow.

Over the last five years, free cash flow per share has averaged out at 1.26 times normalised earnings per share, so it looks like it has a record of generating enough cash to keep the divi safe.

In the year just ended, the company raised its full-year dividend by 17.1% to 41p, marking the twelfth year in a row that the pay-out had risen, so management is not just paying lip service to the concept of a progressive dividend policy.

The group has no borrowings and is cash generative.

What’s not to like?

Well, the stock trades at 15.2 times free cash flow per share, which is not bargain territory, but is an improvement on the three-year average of 19.4.

Earnings before interest and tax, or EBIT, as a percentage of the company’s enterprise value (market capitalisation plus cash) stands at 4.4%, which is down from the three-year average of 6.7%, but pre-tax profits are forecast to grow 171% year-on-year this year, compared to an average decline over the preceding three years of 8.7%, so maybe a corner has been turned.

The only thing I don’t like is the wide bid-offer spread of 1931p – 2,059p, but if we are going to be holding this for, like, forever, then that will not prove too significant, though it will give the portfolio a short term hit.

So, into the portfolio it goes, leaving the Aim sustainable dividends portfolio looking like this:

 

Company

Number of shares

Total cost

Average price per share

Current bid price

Current value

Profit/loss (£)

Profit/loss (%)

Brooks Macdonald

48

£1,003

2090.25p

1,933p

£927

-£76

-7.6%

James Halstead

195

£998

511.69p

465.75p

£908

-£90

-9.0%

Miton Group

2,240

£1,000

44.67p

40p

£896

-£105

-10%

Zytronic

229

£1,000

436.55p

560p

£1,282

£283

+28

 

  • Cash: £5,937
  • Market value of current holdings: £4,009
  • Market value (including cash): £9,946
  • Unrealised profit on current positions: +£8
  • Dividends received: £44
  • Profit/loss from closed positions: -£105
  • Total realised profit/loss + dividends: -£61

As you can see, all of the heavy lifting has been done by touch sensors outfit Zytronic, and it has been showing signs of going off the boil of late, but fortunately floor coverings specialist James Halstead has been rallying ahead of going ex-dividend on Thursday.

Miton, another company in the fund management game, has been out of favour almost since we bought it, so let’s hope it is not a bad omen for Brooks Macdonald.

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