Aristocrats to sustain your performance – Finance

Even though the stock market remains very volatile, the dividend becomes even more important in your total income. To continue to rely on this recurring revenue, we must rely on quality companies. But which ones?

According to The Power of Dividends study by manager Hartford Funds, dividends have accounted for 40% of the total return earned by America’s leading index, the S&P 500, since 1930 (see below). A ratio that evolves over decades, mainly depending on the trend of the stock markets. This dividend is even more important when prices struggle to rise, such as in the 1940s, 1970s, or 2000s when total income was negative. Especially decades marked by geopolitical crises or inflationary tensions like we are facing today.

According to The Power of Dividends study by manager Hartford Funds, dividends have accounted for 40% of the total return earned by America’s leading index, the S&P 500, since 1930 (see below). A ratio that evolves over decades, mainly depending on the trend of the stock markets. This dividend is even more important when prices struggle to rise, such as in the 1940s, 1970s, or 2000s when total income was negative. Especially decades marked by geopolitical crises or inflationary tensions like we are facing today. Targeting dividends can be an ideal strategy, especially if you’re looking for regular income for your portfolio. However, the pitfalls that await dividend lovers abound, as the coronavirus crisis has reminded us that all European banks should ignore their coupons for more than a year. More broadly, rushing to stocks that offer the highest returns sets you up for many disappointments. On the one hand, this income can be artificially increased by an exceptional dividend due to a special event, for example, when the company sells an activity. On the other hand, particularly high yields often reflect markets’ fear that dividend levels will not be sustainable. But one of the most common reasons is that free cash flow generated by operations is no longer sufficient to pay dividends. To simplify, the company then has to go into debt to continue paying its coupon, which is not sustainable over time… Many companies, especially in the European telecommunications sector, have already gone down this path. The latter has been attractive for a long time due to its high yield, but most operators have had to significantly reduce their coupons, starting with Proximus, which was forced to cut its dividend from 2.18 euros to 1.50 euros in 2014 and to 1.20 euros in 2020. A further decrease in 2023 cannot be ruled out. Giant Vodafone has also cut its dividend by more than 70% since 2015. Elsewhere, AB InBev’s dividend has fallen from €3.60 in 2017 to €0.50 over the past two years. particularly as a result of the heavy debt inherited from the SAB Miller takeover. In commodities, mining giant Rio Tinto also more than halved its half-year dividend last summer as metal prices fell again. However, opting for quality companies that offer an attractive and sustainable dividend is easier said than done. Specifically, the key metric to watch is free cash flow. As long as it remains above the amount allocated to dividends and increases, it is likely that the company will be able to maintain or even increase its coupons. Note that this information can be found in the cash flow statement published by the companies. The sector environment should also be considered. Telecom operators that waited before investing in their networks (4G, then 5G and fiber optics) may have given the impression that they could maintain their dividends, but that was only temporary. Similarly, falling metals prices, which prompted Rio Tinto to sharply cut its dividend, are affecting other mining groups, although they have yet to be reflected in results. Finally, keep track of the company’s context. For example, a company that makes large purchases on credit should spend more of its cash flow on deleveraging. So when AB InBev bought its arch-rival SAB Miller, the world’s leading brewer had high hopes of improving cash flow and maintaining a high dividend and paying down debt. However, its results did not develop according to expectations. On the other hand, many banks that stopped their coupons in 2020-2021 continued to make enough profits to maintain their dividends. For an individual, identifying these contexts and uncovering ad hoc companies can quickly become tedious and sometimes very vague. However, there is a parade of dividend aristocrats. In general, these are companies that have managed to maintain or increase their dividends for a long period of time in their history, thereby demonstrating the ability to withstand crises. Technically, the definition of “aristocrat” varies slightly depending on the region and analysts. In the US, for example, the S&P 1500 High Yield Dividend Aristocrats index selects companies that have increased their dividends every year for at least 20 years. Industry is the best-represented sector (18%), ahead of consumer staples, financial companies and utilities. This broad diversification is also reflected in the index’s core holdings: VF Corporation (ready-to-wear brands), Walgreens (pharmacies), National Retail Properties (real estate), Franklin Resources (financial services) and IBM (technology). The total dividend yield of the index is 3.1% gross. SPDR S&P US Dividend Aristocrats UCITS index fund (Frankfurt Stock Exchange SPYD, IE00B6YX5D40, annual fee 0.35%) allows direct investment in 119 stocks of this S&P 1500. In Europe, the definition of aristocrats is generally low. is more flexible, with only about 30 stocks reaching the 20-year mark. The S&P Euro High Yield Dividend Aristocrats thus select large continental companies whose dividends have been maintained or increased annually for at least ten years. The index is more concentrated than the U.S., with basic materials and industrials accounting for about 50% of the total weight. The main stocks are Bouygues, BASF, Solvay, Allianz and Munich Red. The average dividend yield is 4%. You can invest in this index through SPDR S&P Euro Dividend Aristocrats ETF (EUDV on Euronext Paris, IE00B5M1WJ87, annual fee 0.30%). SPDR S&P UK Dividend Aristocrats (Frankfurt Stock Exchange SPYG, IE00B6S2Z822, 0.30% annual fee) complements this well, with UK aristocrats proving more committed to financial services (IG Group, Schroders, etc.), real estate. and consumer goods (British American Tobacco, Unilever, etc.). The average dividend yield is 4.1%.

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