Dividend growth investing

hello investors
I was hoping someone might be able to help me. I’m very interested in the dividend growth investing strategy, investing in companies that consistently raise their dividends year over year. Problem is not many Aussie companies are into raising it year over year.

So I’ve turned to American stocks, but I’m not sure if it’s worth it with the 15% American withholding tax, and the dividends then being taxed here at my marginal tax rate.

The upside however is yield on cost and the ever increasing stream of rising dividends where 10-15 years out my dividend yield could be higher then 10%(pretax).

Does anyone have any experience with this or any advice?

Any response is greatly appreciated

Nickobud said:

Does anyone have any experience with this or any advice? Any response is greatly appreciated

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Hi Nick ….. Well outside my area of expertise, but an interesting question. Hopefully someone can add some meaningful input

Sorry Nick, as with Barney, Im Aussie centric investor. But great question should stimulate somegood discussion, hopefully McLovin drops in he would know about it.
Anyway welcome to the forum, maybe do a search on the top right of the home page, there may be something.

Nickobud said:

investing in companies that consistently raise their dividends year over year. Problem is not many Aussie companies are into raising it year over year.

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I would guess there is maybe 100 or so stocks that have a fairly consistent record with dividend growth, almost
impossible to have a perfect record GFC and other events considered, even CSL had a GFC dividend dip.
~

You said
So I’ve turned to American stocks, but I’m not sure if it’s worth it with the 15% American withholding tax, and the dividends then being taxed here at my marginal tax rate
Actually,you will claim back the US tax paid, but true, no franked benefits

Nickobud said:

I’m very interested in the dividend growth investing strategy, investing in companies that consistently raise their dividends year over year. Problem is not many Aussie companies are into raising it year over year.

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in order to consistently increase DPS, a company has to consistently increase EPS, which means they have to grow. expanding into new markets unlocking economies of scale, increasing productivity (ROE/ROC) by streamlining processes, innovation, developing newer and better products, stuff like that. this all needs sizable capital to set up branches, marketing, localisation of products for new markets, R&D + new assembly lines for new products etc.

if a company pays out most of its profits as dividends, they aren't retaining much capital to invest in their own continuing growth. this is the problem with the Aust market in general - the high dividend payout ratios (encouraged by the franking rules) leave little retained capital to invest in growth.

however, as an investor, what you're really interested in is growing your absolute dividends over time, you don't necessarily need an increase in DPS to do this. you can do it by using some of the dividends received to buy more units, and that's probably what you have to do if you're investing in the Aust market as a whole, since as you already noted, DPS doesn't tend to increase much year over year here.

investing in American stocks (or indexes) is worth it IMHO, i'm investing most of my new funds into an S&P 500 index myself. mainly for macro economic reasons, but with the companies in that index generally retaining most of their earnings and reinvesting it into their own growth, it saves me the trouble of having to do that reinvesting by buying the new units myself.

withholding tax generally isn't an issue, Aust/US has a tax treaty in place to prevent double taxation. you just declare it under the "foreign income tax offsets" box and the tax you would normally have to pay gets reduced by that amount.

Nickobud said:

hello investors
I was hoping someone might be able to help me. I’m very interested in the dividend growth investing strategy, investing in companies that consistently raise their dividends year over year. Problem is not many Aussie companies are into raising it year over year.

So I’ve turned to American stocks, but I’m not sure if it’s worth it with the 15% American withholding tax, and the dividends then being taxed here at my marginal tax rate.

The upside however is yield on cost and the ever increasing stream of rising dividends where 10-15 years out my dividend yield could be higher then 10%(pretax).

Does anyone have any experience with this or any advice?

Any response is greatly appreciated

Click to expand...

The 15% tax you pay to the USA on your dividends, is deducted from your tax bill here.

for example, if your marginal rate in Australia is 30%, then the 15% you have already paid is counted towards that.

you don’t get charged the tax twice.

———————

However, back to your original question.

“dividend growth investing” to me just sounds like regular value investing.

The idea is to find companies whose core businesses are likely to grow over time and increase in profitability and hence be able to fund growing dividends.

these are not hard to find on the asx.

One thing to note is the dividend yield on American stocks is generally much lower 2 to 3% at best compared to Australian dividend stocks that typically pay around the 5% mark or more. That probably also explains why there is probably more US stocks with increasing dividends compared to ASX as there is room to grow dividends and increase payout ratios etc whereas the big dividend payers in Australia are probably maxed out with their payout ratios or getting close to it, hence anaemic growth.

aus_trader said:

One thing to note is the dividend yield on American stocks is generally much lower 2 to 3% at best compared to Australian dividend stocks that typically pay around the 5% mark or more. That probably also explains why there is probably more US stocks with increasing dividends compared to ASX as there is room to grow dividends and increase payout ratios etc whereas the big dividend payers in Australia are probably maxed out with their payout ratios or getting close to it, hence anaemic growth.

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As aus trader says, US stocks have had a huge run since the gfc, mainly because of the effect of devaluing the US dollar, which made all other Countries product dearer, however their dividend hasnt kept u p with their share price.
That is why it is megga important Trump, gets China to come to the table IMO, if he doesnt the US manufacturing base will collapse, and with it t he reserve currency.
I really think if that happens the multi national companies win, they grease the palms of an authoritarian Country while lining their pockets with the proceeds.
IMO this is missing in the press rhetoric, but as I say it is only my humble opinion.

aus_trader said:

One thing to note is the dividend yield on American stocks is generally much lower 2 to 3% at best compared to Australian dividend stocks that typically pay around the 5% mark or more. That probably also explains why there is probably more US stocks with increasing dividends compared to ASX as there is room to grow dividends and increase payout ratios etc whereas the big dividend payers in Australia are probably maxed out with their payout ratios or getting close to it, hence anaemic growth.

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it’s also that the Australian tax system encourages dividend payments due to franking credits, where as the American system encourages retaining profits and using buybacks.

And gov bonds in the US are tax free so US investors use them if in need of money stream
No such luck here

It is possible to have some kind of dividend growth strategy in Australia but it would be nothing like the strict dividend growth strategies that are often used in the U.S. and the opportunity set of companies is much smaller!

For example the even have an index in the U.S. called the dividend aristocrats index. According to Investopedia "The S&P 500 Dividend Aristocrats Index is a list of companies in the S&P 500 with a track record of increasing dividends for at least 25 consecutive years. It tracks the performance of well-known, mainly large-cap, blue-chip companies." The S&P 500 Dividend Aristocrats includes stocks with a float-adjusted market capitalization of at least $3 billion and an average trading volume of at least $5 million, in addition to consistently increasing dividend payments. The index typically contains 40 to 50 companies.

If you removed those market cap and share trading volume restrictions listed above to include smaller less liquid stocks you would most likely find 100+ stocks to choose from! I do not think you could even find 5 companies in Australia that have increased dividends every year for 25 years!

But if you relax your standards for example to pick companies that have paid a dividend every year for at least 10 consecutive years and have increased their dividends overall in that time period by at least 50% (without necessarily increasing them every year) and increased the dividend in at least 70% of individual years, etc then you would have a reasonable sized pool of companies to choose from.

But in all honesty because of the tax and superannuation system and shareholder culture in Australia almost all profitable companies with growing earnings (unless they have a very weak balance sheet) eventually will pay a dividend and if earnings are growing that dividend will increase over time. I am confident even companies like Afterpay and Xero etc will eventually pay growing dividends.

Whereas in the U.S. because of the tax system and other factors many growth stocks will go a long time without paying a dividend (e.g. Facebook even though its massive and generates billions in profits does not pay a dividend yet).

Therefore in Australia (unlike the U.S.) rather than having a specific dividend growth strategy, one can merely have a strategy to select sound growing companies knowing that over time you will likely receive a growing dividend stream.

qldfrog said:

And gov bonds in the US are tax free so US investors use them if in need of money stream
No such luck here

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That's interesting, I didn't know that. So looked into it and it looks right although some Federal and State taxes varies as to whether it's Federal Bonds or Municipal bonds.

But it's no use for us Aussies since we'll be taxed as foreign investors even if we buy US govt bonds

sptrawler said:

As aus trader says, US stocks have had a huge run since the gfc, mainly because of the effect of devaluing the US dollar

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Good point, all US stock indices have made new high's since the GFC and have run up to dizzying heights whereas the ASX is just about at parity with pre GFC high's.

Value Hunter said:

Therefore in Australia (unlike the U.S.) rather than having a specific dividend growth strategy, one can merely have a strategy to select sound growing companies knowing that over time you will likely receive a growing dividend stream.

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Could not agree more VH, this is what has served me well in my retired years. Early in my investing/trading life I was good friends with a broker advisor and between us we had picked likely growth stocks to keep for our old age. In those days there were far fewer stocks around to pick from.

So we both still have the likes of CSL from listing in 1994, COH from listing in 1995, CBA from listing in 1991, WPL from $1.15 in 1987, WBC from $0.95 in 1992 (that’s another story I may have mentioned before) and quite a few others since then. The hardest part was not selling them when they were so much in profit in later years.

I don’t know whether it would be easier or more difficult to pick them these days with the myriad of start-ups and early risers in the market, but the strategy has certainly worked for me.

There's a saying " aussie stocks for income & u.s. stocks (index?) for growth".

aus_trader said:

Good point, all US stock indices have made new high's since the GFC and have run up to dizzying heights whereas the ASX is just about at parity with pre GFC high's.

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that's true, but as much as i favour US investments over investing locally these days, that's not exactly a fair contest. you'd have to look at the ASX accumulation index vs the S&P 500 net total return index to get a more like for like comparison (the net total return index factors in withholding tax, unlike the regular S&P 500, which roughly compensates for the fact that the ASX accumulation index does not factor in franking credits).

on that measure it's a lot closer, but still favours the US (from memory it's something like +90% vs +70% since late 2007 - just before the GFC). basically saying that you'd have had to plough your dividends back into new units just to almost keep up, unless you've carefully cherry picked local growth stocks that have done well (which in turn probably won't have paid much dividends).

Comparing the US markets to the ASX is akin to comparing the quality of an apple vs an orange.
For instance
Dividends in the US are taxed in the hands of the investor so there is effectively double taxation (Once on the profit made by the company and again when a dividend is paid to the investor). But there are taxation benefits with capital gains so there is a powerful incentive for companies to keep dividends low and maximise growth in the value of the business.

The franking credit system we have in Australia creates a powerful incentive for companies to pay large dividends, which is not good if they pay out too much of the profit in dividends.

I coordinate an investing club and one of our portfolios is dividend income focussed. I will post what we have been doing if there is any interest. The basic criteria we use is ROIC >9%, Yield Rolling >4%, DPS CAGR >4%, Gearing<50%, Mkt Cap >$200M, Buy/Sell spread <50 bps.

Nickobud said:

I’m very interested in the dividend growth investing strategy, investing in companies that consistently raise their dividends year over year. Problem is not many Aussie companies are into raising it year over year.

Click to expand...

Sticking to ASX stocks (the US experience is, for the above mentioned reasons, a very different set of circumstances, especially tax treatments), there are a few companies that, if not consistently raising, have managed to either hold dividends steady, or increase on occasion but not every year.

CSL is the obvious one but, great as it has been, this is a rear mirror view; the company's ability to consistently 'win' is not a given. Most other companies tend to be cyclical, with attendant challenges of maintaining payouts.

I will draw your attention to a less glamorous section of the market, that of Listed investment Companies (LICs). Examination of their dividends shows a very consistent pattern, especially among the older more established ones that have reserve accounts, a store of franking credits, pay out from dividends received but not adding a bit of 'spice' from capital growth and shorter term trading/ profit taking.

Australian Foundation (AFI), Argo Investments (ARG), Milton (MLT), as well as AUI and DUI, have managed to increase, or at least hold steady, dividends over each of the last 10 years, at the very least. This is based on a 6-monthly cycle of Interim and Final payments; in addition, one-off factors allow for occasional Special Dividends - such as participation in takeovers, Buybacks, demergers and circumstances like the Shorten franking scare of 2019.

Another Investment house that has exhibited a steady dividend rise is Soul Patts (SOL).

I had a look, and found this from SOL (WH Soul Patts) last Annual Report (and wonder which other company it is in Point 3)

• WHSP has an excellent track record of paying dividends and actively manages its portfolio to achieve its goal of paying a steady and increasing dividend over time.
• WHSP has increased both its interim dividend and final dividend every year since 2000.
• We are one of only two companies to do this of the 500 odd companies in the All Ordinaries Index.
• Total ordinary dividends have increased from 10 cents per share in the year 2000 to 58 cents this year.
• Dividends are declared based on the Company’s regular cash inflows less regular operating costs.
• This year we will pay out as dividends, 82% of the net regular cash inflows from operations.