12 months on and our Dividend Report in Issue 174 has returned 46%, which includes a cash yield of 7.8%. This is more than double the market return of 20% over the same period. Can we do it again? Our team has scoured our universe to find a collection of dividend paying high growth Small Caps.
"It’s much easier to achieve returns on equity of 20% plus when you are small and consequently see your share price doubling in six months."
Small Caps: a powerful way to reduce your portfolio’s risk
Screening stocks for reliable dividend payers is a powerful way of reducing portfolio risk when the market conditions are fragile. And these days, who knows? Your portfolio needs all the protection it can get. This approach tends to select better quality businesses whose share prices are less sensitive to general market weakness.
Even in a rising market, the results are there for all to see. We did a Dividend Report a year ago and those stocks are listed on page 3, having returned 46% over that period! This is the power of the Small Listed Company, or Small Cap. These companies have leverage that their bigger counterparts can only dream of. It’s much easier to achieve returns on equity of 20% plus when you are small and consequently see your share price doubling in six months.
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Why Australians like dividends?
Australian investors more than any market in the world, focus on dividends principally due to the significant incentive of dividend franking, and probably also due to a much smaller economy with commensurately smaller growth opportunities. Australian industrial companies tend to pay out a much larger proportion of earnings as dividends.
In the US, on the other hand, growth is the be and end all, so US companies re-invest earnings in their businesses or failing that spend money on share buy-backs to enhance EPS. High dividend payout ratios are viewed as an admission of failure. But many companies are unable to invest profits in initiatives that deliver satisfactory returns, so cash that should have been returned to shareholders ends up wasted on failed growth initiatives.
"[...] a consistent history of dividends is usually proof of a quality business."
The discipline of the dividend
An explicit dividend policy that results in a reliable income return for shareholders has a disciplining effect that makes management less likely to undertake wasteful investment and to be generally better stewards of capital. When it is clear that dividends are an important component of shareholder returns then management will be more harshly judged if injudicious capital management results in a dividend cut. Conversely there are many examples of companies that grew strongly for many years while paying little in the way of dividends only to run into difficulties that lead to substantial capital losses.
As we stated above, a consistent history of dividends is usually proof of a quality business.
Another major positive is that a maintainable dividend provides price support in times of share market weakness or volatility.
Still not convinced about the power of Small Caps? Watch this video featuring Richard Hemming on a Small Cap Portfolio.
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