The US stock market is up nearly 69 times over the last fifty years – not bad – but if you add the impact of dividends, the S&P 500 is up almost 300 times for Sterling investors. Collecting and reinvesting dividends really works. Dividends represent most of the profits that owners of shares enjoy in return for putting capital at risk, with the remainder being used to buy back shares or reinvested back into the company, thereby boosting its share price over time. However, dividends aren’t necessarily sacrosanct; many companies find that when they go through tough times, they are forced to cut their dividends to shore up their balance sheets, survive the downturn and wait for better days.
Dividend Aristocrats are companies that have maintained or increased their dividend every year for the past twenty years. That period includes the end of the dotcom technology bust, the financial crisis and a global pandemic. Of the 1500 largest companies in the US, around two thirds of companies have been listed for over 20 years. Of this group of stocks, just one in eight have consistently paid a dividend over this period, making it a select group of companies.
You might think that this resilience would be rewarded with a valuation premium to the wider stock market, and for much of the last decade, that has been the case. However, over the last couple of years, as investors have paid higher valuations for growth companies, some of which won’t turn a profit for several years, these long-term survivors’ valuations have fallen below that of the market. We think this provides an opportunity to buy great businesses that are temporarily out of favour.