The importance of dividends

It must be an age thing.  An old City observer, like myself, writes in the FT today about the importance of dividends and how we’ve lost sight of equity performance by over-focusing on share price growth.

He talks about the view in the mid-80s that dividends were a key, if not the key, part of a shareholder’s return. I have strong recollections of being taught the same as I entered the City in the early 1980s, with one grey-haired merchant banker telling me that the metric he always watched was dividend cover (the mulitiple by which earnings cover the payment of dividends), and he stressed the importance of this in falling markets.  We’ve lost our way on this over the years as we’ve all turned our focus on share price growth, which the FT writer today interestingly ascribes to indexation and the trend towards share buy-backs.

I’m with him.  In this market, look for the steady dividend payers with good earnings cover (at least two times).  Then look for good defensive market positions and/or growth prospects in emerging markets.  That takes you to  the likes of Diageo, GSK, BAT, Reckitt Benckiser, Vodafone and Pearson as being core holdings in any porfolio, with the likes of RSA thrown in for its 8.5% yield and trading at around book value.


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