An investment that pays 48 per cent a year sounds like one to file on the ‘too good to be true’ pile.
Even one paying out a steady 28 per cent, 22 per cent or 19 per cent has the whiff of something not quite right.
But interesting figures highlighting long-term investing’s benefits have revealed that some lucky investors could be reaping those annual rewards in dividend payments from big name British company shares.
There is one caveat, however, they would need to have bought them a decade ago.
A list of dividend hero shares that have raised payouts every year for a decade has been released by AJ Bell – and some yield huge amounts now compared to their price back then
That 48 per cent, 28 per cent, 22 per cent and 19 per cent, represent the current dividend yields received by an investor who bought shares in Ashtead, Micro Focus International, Hargreaves Lansdown and St James’s Place in July 2008, when compared to the price they paid, according to investing platform AJ Bell.
Of course, none of those companies yield anywhere near that much if you buy their shares today.
But nor did they offer that back then. The dividend yield in July 2008 on those companies was 4.1 per cent, 2.5 per cent, 4.2 per cent and 2 per cent, respectively
Crucially, however, the firms have spent the past decade raising dividend payouts year-in, year-out.
And that means on shares bought in 2008, an investor would now be picking up an extremely handsome annual payout compared to what they cost.
This is how Ashtead shares bought in 2008 with a dividend yield of 4.1 per cent now pay out 58 per cent of the price paid for them each year.
|2018 yield on July 2008 share price||2008 yield on July 2008 share price||Total return since July 2008|
|Micro Focus International||28.40%||2.50%||657.1%|
|St. James’s Place||19.30%||2.00%||583.9%|
|British American Tobacco||11.40%||4.90%||197.2%|
|Paddy Power Betfair||15.00%||3.20%||509.1%|
|Standard Life Aberdeen||10.70%||5.90%||150.3%|
|Source: Thomson Reuters Datastream, Company accounts, AJ Bell Research|
AJ Bell has dubbed these the dividend hero stocks (echoing the name awarded to investment trusts that have raised dividends each year for the longest period of time).
The list is 26-strong and for shares to make the cut, dividends needed to be raised each year for ten years.
Bought today, this basket’s average dividend yield is forecast to be just 3.2 per cent – below the FTSE 100’s 4.1 per cent average. Based on their cost a decade ago though, the average yield now is a hefty 12 per cent.
There are a couple of interesting elements to the list. Many of the companies are household names, or at least well-known to investors, but only half were in the FTSE 100 a decade ago, with the rest rising up through the stock market ranks.
Russ Mould, investment director at AJ Bell, says: ‘We often take dividend yields as a snapshot, looking at investors buying the stock at today’s price. However, investing is a long-term game, and many investors have had their money in these companies for a number of years.
Investing is a long-term game, and many investors have had their money in these companies for a number of years
He added: ‘However, only 13 of the 26 were actually in the FTSE 100 index a decade ago, so investors may need to dig through the FTSE 250 listing of smaller companies to find the next generation of dividend growth champions to buy today.’
The total return on most of the companies has been pretty good – and big winners mean it averages out at an impressive 590 per cent – although some stocks, such as SSE and Imperial Brands, have been lacklustre.
Intriguingly, down the bottom of the pile some of these dividend heroes don’t have particularly attractive yields based on their 2008 price.
Scottish Mortgage pays just 2.8 per cent, Shire pays 3.6 per cent and BAE just 5 per cent.
Yet, investors have been rewarded with ten-year total returns of 380 per cent, 421 per cent and 133 per cent, respectively.
If ever there was a good illustration of why buying and holding solid dividend stocks can combine with compounding to deliver good returns this list is it.
There is, of course, one problem: could you spot such winners in advance?
But that’s an argument about passive or active investing for another day.
How did Ashtead end up with a 4,360% total return?
Ashtead shares have enjoyed a meteoric rise over the past decade and dividends have been increased thirteenfold
The yields on the dividend hero stocks are eye-catching based on their price a decade ago and total returns on many have been very handsome, but one company in particular stands out – Ashtead.
So how did the international equipment rental company end up with an astonishing 4,360% total return.
Russ Mould explains: ‘Ashtead had a near-death experience at one stage after a debt-funded acquisition in the US went wrong/was mis-timed in 2000 and the shares at one stage made it as low as about 6p (in 2003).
‘It began to make a slow recovery but the shares were knocked back to 30p by the 2007-09 financial crisis and recession.
‘Geoff Drabble took over as CEO in 2007 and the turnaround began, as non-core assets were sold, debt reduced and an economic upturn then enabled the firm to make the most of the strong competitive positions it had built in the UK and especially the US, which represents over 90 per cent of sales.
‘The strong balance sheet and increased profits then permitted the firm to put together a long sequence of big dividend increases, from 2.5p in 2007 to 33p in 2017/18, with more to come (according to the analysts’ consensus). ‘