For all that investors cherish and search for shares that can deliver big returns, it’s a striking fact that dividends are the factor that accounts for a whopping 64% of total returns in Europe since 1995.
Such firms that have long records of dividend increases are known as ‘dividend aristocrats’ to Credit Suisse, which espoused this method of investing again this week.
The thinking goes that investors should focus on these blue-blooded corporations rather than the seemingly more attractive companies with the highest yields.
A high yield can often mean the shares are underperforming and while that can suggest the shares are undervalued it can also mean that the market is discounting some performance issues in the past or expected in the future.
Last year, Credit Suisse noted that the highest quintile of dividend yields were the worst performers over the previous decade in Europe, with many of these high-yield companies being ‘disrupted value’ stocks that eventually ended up cutting their dividend.
Another advocate for these shareholder return royals is Russ Mould, investment director at AJ Bell.
“Often defending a high yield can be a burden for a firm, as it sucks cash away from vital investment in the underlying business, or can be a sign that the company is in trouble and investors are demanding such a high yield to compensate themselves for the (perceived) risks associated with owning the equity,” he says.
The strongest long-term performance often comes from companies that have the best long-term dividend growth record as they often combine dividend increases with share price gains – the investors’ dream.
“The increased distribution will over time drag the share price higher through sheer force,” Mould says, suggesting that a 1p per share dividend on a 100p share price “may not catch the eye, but if that dividend reaches 10p in a decade’s time it almost certainly will”.
Since 2020, dividend aristocrats have outperformed by 20%, according to Credit Suisse’s calculations, with analyst Andrew Garthwaite pointing out that this style of investing tends to outperform when purchasing managers index (PMI) survey data falls.
The style is currently “cheap”, the analyst said, noting that investor flows into dividend funds have held up of late.
Just five top European dividend toffs were cited by the Credit Suisse team, Coca-Cola, Diageo PLC (LSE:DGE) and Unilever PLC (LSE:ULVR), Sanofi and Air Products.
Mould’s calculations find 17 FTSE 100 names with at least 10 years of consecutive dividend hiking.
Topping the list is Halma PLC (LSE:HLMA), with a 43-year record of straight dividend increases since 1979, followed by Scottish Mortgage Investment Trust PLC (LSE:SMT), with 38 years since 1984.
(For more investment trusts like SMT with long dividend records, the AIC regularly trumpets an impressive list of dividend heroes.)
Next are the dividend children of the 1990s, with Spirax-Sarco Engineering (LSE:SPX) PLC, DCC PLC (LSE:DCC) and The Sage Group PLC (LSE:SGE) respectively 29, 27 and 26 years in a row since they first started raising their final dividend.
British American Tobacco PLC (LSE:BATS) has a 24-year record, while Croda International PLC (LSE:CRDA) and Diageo have 23 years. Dechra Pharmaceuticals PLC (LSE:DPH) is on a run of two decades, while Ashtead is three years away from that record.
Hargreaves Lansdown has hiked is total dividend for 14 years, Intermediate Capital Group (LSE:ICP) for 12, RELX PLC (LSE:REL), London Stock Exchange Group PLC (LSE:LSEG), National Grid PLC (LSE:NG.) and United Utilities Group PLC (LSE:UU.) for 11, and Hikma Pharmaceuticals PLC (LSE:HIK, OTC:HKMPF) for a single decade.
The average capital gain from this Footsie list is 423% and the average total return is 579% over ten years, compared to the FTSE 100's 29% and 90% respectively.
Outside the blue-chips, some mid-caps that might make the minor ranks of the dividend gentry appear to be Cranswick PLC (LSE:CWK), Bodycote Group (LSE:BOY) and Rathbones Group PLC (LSE:RAT, OTC:RTBBF), while some AIM firms with good dividend records include RWS Holdings (AIM:RWS) PLC, Wynnstay Group PLC (AIM:WYN), Brooks Macdonald Group plc (LSE:BRK), Cohort PLC (AIM:CHRT), CareTech Holdings (AIM:CTH) and Tandem Group PLC (AIM:TND), based on dividend data on SharePad.
With the ravages of the pandemic taking a toll on the ranks of firms that can point to long dividend growth track records, there are certainly many more companies that have only a small blemish in their history of shareholder returns.