If you want to build a high yield, low risk portfolio, looking for companies with a record of reliable dividends and profits is a good start, but it’s not enough.
A truly low risk portfolio must defend again inflation, which means it must pay a dividend which can grow fast enough to match – and preferably beat – inflation. In short, an investor looking for high yields and low risk must also look for reliable, profitable dividend growth.
But first, a note of caution.
Although I use the phrase ‘reliable’ growth, it’s a relative term. Growth can never truly be relied upon, but for some companies it’s a more likely outcome than it is for others. It’s the companies that are most likely to grow at or above the rate of inflation that I’m after, and I want them to do it year after year after year.
Finding progressive dividends
There are various way to approach this search for (relatively) reliable growth. It can be a good idea to check that the company has a progressive dividend policy, i.e. an explicitly stated intention to grow the dividend every year, or at the very least to never cut it.
However, the quickest way to find reliable growth is to search for it in the company’s financial history. I know some people say “don’t invest by looking in the rear view mirror”, but I don’t believe that. I think the best place to look for companies that can grow in the future is to look for companies that have already proven that they can grow in the past.
For me the clearest sign of a progressive dividend is that it has already been increasing every year. Exactly how long you define “every year” is debatable, but I like to look at the last 10 years.
So the easiest way to spot a progressive dividend is to count how many times the annual dividend (per share) went up in the last decade. The more times it went up, the more progressive the dividend is.
What to do about dividend cuts
A lot of investors panic when a company cuts its dividend. I’m not talking about a complete suspension and no dividend payment at all; I just mean that the dividend went down from one year to the next.
Is that reason enough to sell?
I don’t think it…
