This article is written by guest blogger @battlebus141, an accomplished and very experienced investor with over twenty five years of navigating the stockmarket. He describes himself as a small cap stock picker and a long-term investor. You can find his views and comments regarding stocks/shares on Twitter and ADVFN.
When is a dividend not a dividend?
When it’s a progressive dividend of course! Everyone likes a dividend but rapidly growing companies don’t necessarily pay a dividend as the bulk of their working capital goes to fund growth. So if you’re seeking a share that pays a decent yield say something that pays out two to three percent, you may be inclined to buy what I call an income stock. The trouble with income stocks is the growth aspect tends to be at a lower level. Now if you want to maximise growth and income you can’t go far wrong investing in a company that introduces a progressive dividend.
‘Introduces’ is the key word here as that’s the best point to invest, when you will catch the company before the expected growth becomes apparent. I’ve been transferring my higher income stocks into progressive dividend stocks over the last couple of years and I’ve found it to be very rewarding. All of them have been top performers in the portfolio.
To pick an example, I’m using Aim-listed Hydrogen Group (HYDG), not a buy recommendation but I do hold. The definition of a progressive dividend is that the dividend rises at least in line with increases in EPS. Joe Koeser a famous German businessman once said “At the end of the day dividends are not being paid with margins they are paid with earnings per share” Rises with a progressive dividend also have the benefit of beating inflation. So, looking at HYDG results for FY 2017 and from a usually cautious management they stated “The boards confidence in the groups future prospects has enabled it to re-initiate the payment of a dividend and with the intention to adopt a progressive dividend. “
The first dividend was 0.8p at a cost of 0.3 million on a basic EPS of 4.4p. The key here is that management had already seen prospects were improving by such an amount that they sought to make the dividend progressive (This was before the market did, with the shares trading around 30p) Looking for confirmation on what those expectations might be as it’s wise to look for confirmation, on further reading they predicted to increase profit conversion to 15%, this is the term recruitment companies use. Basically it’s PBT (profit before tax) divided by NFI (Net fee income). This was at a time when the profit conversion was 4%…Now I hear you say, that is some upgrade in expectations almost 300%! If I was cautious i’d maybe say 8%, a doubling, so this says to me management are very confident on long term prospects.
This was the signal to buy with the shares trading at 33p and with the first dividend of 0.8p yielding 2.4%. Since then the shares have almost doubled and an interim dividend has been introduced at 0.5p so the yield is now 4% on my initial purchase. Recent trading updates spoke of profits ahead of expectations and a strong balance sheet, as profit has been converted into cash. What better signals of a company’s future health could you get and it was all leading me to believe that in time, the dividend will be closer to 10% and my investment will have tripled in value.
To summarise, this is only one example, but don’t fear. The next company to introduce a progressive dividend will be along shortly. So if you’re considering an investment and want both capital growth along side a decent growing yield and a sense that a company’s health is about to improve, remember these two words Progressive Dividend and put some into your portfolio.
The additional beauty of progressive dividends is that when compounded in a long-term portfolio, they can enhance the value of your initial investment substantially. As Albert Einstein eloquently stated, “Compound interest is the eighth wonder of the world. He who understands it…earns it… he who doesn’t … pays it.”
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