Dividends can make a major contribution to the total return you get from shares over time. But at moments of heightened economic uncertainty, it can be hard to know for sure whether a stock's payout will remain intact.
One measure that tells you more than most about a company’s dividend policy is its payout track record. If you can find a history of dividend growth - especially if it’s matched by earnings - then it could be a promising sign. One stock with a track record like this is Investment Services group, Impax Asset Management (LON:IPX).
Problems with high yielding shares
To understand why dividend track records are important, it’s worth briefly exploring one of the big challenges in income investing…
When it comes to dividends, investors often look for the biggest bang for their investment buck - which means focusing on the yield. Yield is calculated by dividing the dividend per share by the price per share - and changes to either of them will impact the yield. This is where you find a classic problem with high yields - and that's they can be attached to troubled companies.
When share prices sink lower, the yield on a dividend-paying stock will rise. It’s then up to the investor to decide whether the market has been unfair or whether the high yield is actually a signal that the payout might be cut. This can be very difficult when the economic outlook is even less certain than normal.
Why dividend growth is useful
Most income strategies use protective measures to avoid dividend cuts - and this is where a history of payout growth comes in.
It can be preferable to see regularity and dependability in the dividend, rather than just high yield. That’s because consistent, progressive dividend policies can be a pointer to well-managed firms. It can suggest that management are cautious but confident in growing dividends in line with growth in the overall business.
This view is supported by various studies, including one by the fund managers Cliff Asness and Robert Arnott. They examined the relationship between dividends and future earnings and found that managers tend to signal their confidence about future earnings through the dividends they pay.
So there is evidence that long-term dividend growth is a useful signal.
Analysing the dividend growth at Impax Asset Management
So how does this show up in Impax Asset Management?
Impax…
