Screening For Sustainable Dividend Growth

28th Mar '23 by Roland Head

15 comments 2562 reads

This week I’m looking at a topic close to my heart – finding companies that can provide a sustainable, growing, dividend income.

A portfolio of such shares has the potential to provide a reliable passive income, with minimal trading. Over long periods, sustainable dividend growth tends to reflect underlying business growth, and should also lead to share price growth.

This means that with dividends reinvested, a dividend growth strategy can also be a good way to generate long-term compound gains.

In pursuit of a systematic approach to finding sustainable income, I’ve built a new screen to try and capture what I believe are the essential qualities of a good dividend.

I should point out straight away that this screen will probably exclude some suitable stocks and include some unsuitable choices. That’s okay with me. Indeed, I think it’s to be expected.

As with the StockRanks, the purpose of a screen isn’t to achieve a 100% success rate. That’s not realistic. Instead, we want to swing the odds in our favour by selecting a statistically favourable group of shares. I think I’ve been able to do that here, as I’ll explain.

Sustainable income screen criteria

In this section, I’ve split up the rules I’ve created into different categories and tried to explain why I think they’re important.

I’ve linked to my sustainable dividend income screen here.

Which companies?

To start with, I created three simple rules to filter out stocks that are statistically unlikely to offer the kind of qualities I’m looking for.

First of all, I don’t want any micro caps or foreign shares. These may sometimes have attractive income qualities. But they can be riskier and will require too much in-depth research for this strategy.

I’ve also specified a minimum StockRank in order to exclude shares that are statistically less likely to perform well. This might exclude some good businesses, but as a group, we know that companies with low StockRanks have underperformed over the last decade.

Rule #1: Market cap > £50m

Rule #2: Primary listing ==1

Rule #3: StockRank > 50

Here’s how this looks in the screener:

Dividend metrics

Sustainable income is about company culture as well as financial performance. What I want, ideally, is to…

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Lucky dip

28th Mar '23

Excellent and timely article Roland. I was looking to create a watchlist for my next year ISA. You made my search much easier. As you said , lots of banks, insurance and financials are excluded because of not paying dividend during Covid. Not fair because many were forced to stop. Energy is excluded for the similar reasons. Not sure why BAE is not in the list.

Fancy seeing Hargreaves in this list. In fact I have been a buyer recently and has dropped more today. I own many in the list already. If I am going to choose only one from your list, it is going to be IGG.

Thank you again.

Roland Head

Hi Lucky dip,

BAE Systems (LON:BA.) misses out on a technicality - the stock's increased valuation means that its dividend yield has fallen below my cut off (slightly):

This kind of thing is always a factor with screens. I often find it sometimes pays to mess around by adjusting the rules slightly to see what changes in the results.

You can make a duplicate of the screen and edit the rules yourself, if it's of interest.

Regards,

Roland

ANNESTAFF

Thank you, most useful, but please could you tell us which companies would have made the cut if they hadn't cut their dividend during the pandemic?

andrewdb

The screen looks sensible and there are a couple of constraints I really ought to look at (the ones on dividend growth rates > 0 historic and forecast). Thanks.

But it highlights the fact that we cannot see something that is very important :-

how well does this screen work in a back-test

That is a question for Stocko, not Roland. It is clear the machinery is in place as we can see historic performance of the guru screens.

(I would also like to know it the screen will work going forwards, but that may be asking too much :)

Rusty2

Hello Roland, thanks for this article. I see Rio Tinto (LON:RIO) is on your list, it announced last month it was cutting it's dividend by around 50%, so this would now fail your screen?

It is worth double checking dividends, I have found quite a few on Stockopedia, to be inaccurate, over the past 2 years.

Quite a few excluded from your screen because of reduced or no dividends because of Covid, is that fair? I think Oil and Insurance stocks probably more reliable than commodities at the moment. Recruiters could also be hit by a recession.

Sharewallah

An excellent article. Thank you Roland.

Caper4

Thank you Roland. I always enjoy reading your articles. See that you have not included any Banks and I assume this is because they suspended paying a dividend during Covid, although of course they were given no choice by the BoE . Would you not consider , for example, HSBC and Standard Chartered otherwise?

davidallen77

copy the screen and delete rule 5 and compare the two screens

KevinS1

Great article Roland and plenty to mull over. A really useful screen and one which I will come back to regularly.

All the best. K

29th Mar '23

Caper4,

I might indeed consider HSBC Holdings (LON:HSBA) and Standard Chartered (LON:STAN) (I hold), but it's worth noting that the dividend suspension isn't the only reason they don't qualify.

None of the big FTSE 100 banks meet my criteria for a 5-year average return on equity of 10%, either. Although their profitability did improve last year.

Hi Anne,

You can make a copy of the screen and then make changes to the rules yourself to test the effect of single changes. I often find this very useful in understanding which factors are having a big impact on my results:

Then you can activate/deactivate individual rules or edit them:

Hope this helps.

jabberjab

Very useful starting point Roland so thanks for doing that. I have thus far avoided too much complexity in making my own screens so this is a great one to copy and play around with. Should help a lot going forward for a relatively new investor such as moi.

r1poll

Only brought up three three stocks on Asx

ozzygoff

30th Mar '23

Thanks for providing an this excellent screen. This is exactly what I am looking for. I know I have an unbalanced portfolio of higher yielding and yet more risky shares. So I now realise I need to rebalance by adding shares with a lower and hopefully growing yield.

djlcollinge

18th Dec '23

It’s a very good screen. I guess my own deviation would be to use industry medians rather than absolute thresholds but I respect the core principles used. The right shares are coming up. It covers all the themes contained in the income screens (mantrua etc).

Screening for sustainable dividend growth

Sustainable income screen criteria

Which companies?

Dividend metrics

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Roland Head

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