THE INVESTOR
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the higher the cover, the greater the security of
the dividend payment is likely to be
‘When you are looking for dividend
growth, the most important thing to look for
in terms of sustainability is cover,’ saysAlex
Stewart from broker Shore Capital.‘On that
basis, buying the highest-yielding stocks may
not always be the best policy. Investors should
instead focus on security of income ow.A
company such as food producer Cranswick,
for example, has raised its dividend every year
since its IPO (initial public o ering) in the
1970s.That’s sustainable growth for you.’
On a sector basis, tobacco stocks, large
alcoholic drinks companies, telecoms providers
and transport groups are often mature
businesses, with a tendency to reward their
investors.The rst two may raise eyebrows
among ethical investors, but smoking and
drinking continue to deliver pro ts, while
telecoms stocks such as BT,Vodafone and even
TalkTalk tend to generate plenty of cash.
Vodafone has traditionally been one of the
largest dividend payers in the UK – in the
rst quarter of last year it returned almost
£16 billion to investors following the sale of
its stake in US mobile operator,Verizon. Now
Getty Images, Press Association
game.We look at their six-year history and
their forecasts for the next three years.We then
carry out four tests: how they make money,
the strength of their balance sheet, their
competitive position and their valuation.The
idea is that the 60 or so companies in our fund
will leapfrog the competition over three years.’
Reid’s approach is highly speci c but,
like other income seekers in the market, he
believes earnings cover is crucial.
‘It is a question of looking at the dividend,
seeing howmuch it costs and howmuch it
is covered. For us, the cash dividend cover
should be 1.3 times and rising.’
With interest rates still at historic lows, the
search for income is increasingly important.
Against that backdrop it is worth noting that,
even though income from the FTSE 100 fell
last year, the index is still yielding around
3.5%. It is reassuring to know that the main
index still beats bank accounts hands down.
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Capita predicts
that underlying
dividends in the
UKwill rise 5.5%
to £83.7 billion
this year
SECTOR WATCH
Balance sheet
The financial crisis has changed the face
of dividends, with investors no longer able to rely on
sectors such as banking and food retail. Now, telecoms
and housebuilders are among those leading the way.
a smaller business, it has pledged to remain a
generous distributor of dividends in the future.
Of course, predicting where income
growth will come from is not an exact science.
Majedie’s Reid adopts a focused approach,
seeking out companies that are likely to pay
market-beating dividends in the future:‘You
have to look for companies that are raising their
