logo-loader

Invest in ‘dividend aristocrats’ and don't be tempted by high yields, says Credit Suisse

Published: 12:31 01 Jul 2021 BST

Diageo PLC -

Investors should focus on ‘dividend aristocrats’ that have been able to consistently grow dividends rather than companies with the highest yields, Credit Suisse has advised its clients.

Nearly 60% of total returns since 1900 have come from (reinvested) dividends over the past 120 years in the US, the Swiss bank pointedly observed in a note on Thursday.

“However, we believe that just focusing on dividend yield has been an unconvincing style,” analyst Andrew Garthwaite said.

In the past decade in Europe, data shows that the highest quintile of dividend yields (rebalanced weekly) were the worst performers.

This is, the analyst noted, as these high-yield companies tended to be the ‘disrupted value’ stocks that eventually ended up cutting their dividend.

“It is thus critical to look at dividend growth as well as yield,” he said.

Looking at the ‘dividend aristocrats’, namely the stocks that have been able to consistently grow their dividend, they have actually outperformed by 40% and 15% over the past 12 years in Europe and the US, respectively in price terms alone.

Top toffs for dividends in London were suggested to be a quartet yielding at least 2% and rated ‘outperform’ by the bank: Guinness and Smirnoff maker Diageo PLC (LON:DGE), support services group DCC PLC (LON:DCC), business publishing and events group Relx PLC (LON:REL) and consumer goods colossus Unilever PLC (LON:ULVR).

In the US, the dividend grandees were suggested to be digger manufacturer Caterpillar Inc (NYSE:CAT), industrial and consumer products titan 3M Co (NYSE:MMM) and health care behemoth Johnson & Johnson (NYSE:JNJ), while continental Europe’s dividend nobility were seen as pharmaceutical companies Sanofi and Coloplast.

In the US, Garthwaite pointed out that dividend aristocrats “tend to move very closely with real yields” and are currently discounting a 1.5% Treasury Inflation-Protected Securities yield though at Credit Suisse they “do not see real yield (TIPS) rising by much”.

He added that valuations are also “abnormally cheap” on both price-earnings and price-to-book valuation metrics – 16% and 28% below norm – while the dividend aristo style “performs much better when ISM falls (and ISM is likely to peak over the summer)”.

Caledonia Mining tackles 2023 challenges with optimism for 2024 as it...

Caledonia Mining Corporation PLC (AIM:CMCL, NYSE-A:CMCL) chief executive Mark Learmonth tells Proactive's Stephen Gunnion the company faced a challenging 2023, primarily due to poor production in the first half of the year at its core asset, the Blanket Mine in Zimbabwe, and an underperformance...

2 hours, 18 minutes ago