THE IM­POR­TANCE OF IN­COME

Shares - - GREAT IDEAS UPDATES -

One ad­van­tage of con­trar­ian in­vest­ing is that the out-of-favour stocks we look for of­ten of­fer higher-than-av­er­age div­i­dend yields. But we never con­sider a high yield an at­trac­tion in its own right.

All that glit­ters is not gold – and an en­tic­ing div­i­dend is worth lit­tle if it can’t be sus­tained. That’s why we look for com­pa­nies with a yield that is both at­trac­tive and sus­tain­able over the longterm. As part of a ‘belt and braces’ ap­proach we of­ten look for a re­li­able div­i­dend to pro­vide us with a re­turn while we wait for our in­vest­ment the­sis to play out. As we typ­i­cally in­vest in com­pa­nies where ma­jor change is planned or al­ready afoot, this can be cru­cial. Ex­e­cut­ing an ef­fec­tive turn­around can re­quire time and pa­tience and we want to be sure that the com­pany has the where­withal to main­tain share­holder pay­outs through po­ten­tially tur­bu­lent times.

Be­ing paid for our pa­tience

If our re­search shows that the div­i­dend is sus­tain­able, then we can af­ford to be pa­tient – se­cure in the knowl­edge that we are be­ing paid to wait. That’s an ideal sit­u­a­tion for us: a strong div­i­dend yield that gives us a con­sis­tent and at­trac­tive level of in­come while we await the re­turn of health to the busi­ness – and hence its share price.

We value div­i­dends not only be­cause they boost port­fo­lio re­turns, but also be­cause we un­der­stand the im­por­tance of reg­u­lar in­come to our in­vestors.

Mak­ing in­come more pre­dictable

We an­nounced a step-change in­crease in our div­i­dend in De­cem­ber 2017. This boosted the reg­u­lar div­i­dend by 48%, the to­tal div­i­dend in­creased by 11%. As our in­vest­ment style tends to gen­er­ate an aboveav­er­age div­i­dend in­come, com­pared with global eq­ui­ties, we have re­warded our share­hold­ers with a higher and more pre­dictable in­come stream than pre­vi­ously. Also, we have moved from semi-an­nual to quar­terly div­i­dend pay­ments. This pro­vides a more reg­u­lar in­come to our share­hold­ers. Of course, it should be re­mem­bered that div­i­dend in­come is not guar­an­teed and can go down as well as up.

Thirty-four not out

An­other key ob­jec­tive is to achieve div­i­dend growth ahead of UK inflation. We have in­creased our net div­i­dend in each of the last 34 years and the net div­i­dend has been in­creased or main­tained since at least the Sec­ond World War. Just as with our port­fo­lio of in­vest­ments, the sus­tain­abil­ity of our own div­i­dend is im­por­tant to us and this is helped by rev­enue re­serves of more than three times the reg­u­lar div­i­dend. This pro­vides a strong foun­da­tion, so were the port­fo­lio to ex­pe­ri­ence a tem­po­rary short­fall in in­come the com­pany would still be able to main­tain its div­i­dend pol­icy.

Drip, drip

Fi­nally, it is al­ways worth em­pha­sis­ing the po­ten­tial im­pact of rein­vest­ing div­i­dends. Div­i­dends form a large part of to­tal re­turns and this is espe­cially true when the in­come is rein­vested. Cer­tifi­cated share­hold­ers can take ad­van­tage of our Div­i­dend Rein­vest­ment Pro­gramme (DRIP), al­low­ing them to har­ness the power of com­pound­ing and po­ten­tially en­hance re­turns sig­nif­i­cantly over the long-term. As at the end of July 2018, an in­vest­ment in The Scot­tish In­vest­ment Trust would have re­turned 3 times its value over the last 20 years. With div­i­dends rein­vested, this would have in­creased to 3.7 times the orig­i­nal in­vest­ment – an up­lift of 25%. This un­der­scores the im­por­tance of in­come – and shows how a steady drip of div­i­dends can swell to a size­able flow.

High con­vic­tion, global con­trar­ian in­vestors

For more in­for­ma­tion visit www.thescot­tish.co.uk or fol­low @ScotIn­vTrust

The Scot­tish In­vest­ment Trust PLC

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