Dividend dynamos: spotting tomorrow’s income-paying star stocks.
The Scottish American Investment Company (SAINTS) focuses on the long term and compound growth when income investing. Toby Ross and James Dow pick four payout winners.
Toby Ross and James Dow at Jupiter Artland, Edinburgh. Photography by Chris Close
Please remember that the value of an investment can fall and you may not get back the amount invested.
This article originally featured in Baillie Gifford’s Autumn 2021 issue of Trust magazine.
From the slow-brewing romance of the Gold Blend couple in the 1980s, to George Clooney’s comic capers in pursuit of a decent cup of Nespresso, food giant Nestlé has always been able to nail an iconic advert.
More importantly, the Swiss-based company has ensured that the kitchen staples it sells move as smoothly and successfully as Clooney in anticipation of changing tastes. It’s a crucial attribute for any established manufacturer – and for income investors looking for tomorrow’s dividend stars.
The Scottish American Investment Company (SAINTS) seeks out firms that can match or even surpass the record of Nestlé: in the 18 years since the trust first invested, the company has delivered a total return of more than 1,100 per cent, compared with around 500 per cent for the global equity market. Over the same timeframe it has increased its dividend every year, compound growth that continued even through the global crises of 2008 and 2020. James Dow, joint manager of SAINTS, explains: “We want to invest in companies run by people who embrace the future. Nestlé is a great example of a long-established, well-run business that has focused on reinventing itself and its products to stay relevant for the 21st century.”
In contrast, he adds, Nestlé’s US rival Kraft Heinz “has got into a lot of trouble” because it made assumptions about the eternal appeal of its existing products. “It failed to invest sufficiently in or nurture the business.”
The SAINTS team, Dow says, is nimble enough to pick stocks outside the pool of familiar dividend-paying companies such as Nestlé, Microsoft and Procter & Gamble. Much of the portfolio is invested in less well-known income choices. Its approach, however, remains consistent.
“We strongly believe that if you’re investing for income, you’re much better off focusing on the businesses that will provide a long-term, resilient, compounding income stream – often starting on a lower yield but growing over the years – rather than going for the high-yielders that then have to slash dividends in difficult years,” says Ross.
SAINTS first invested in Nestlé in 2003, the year of the Hutton Enquiry, Love Actually and Roger Federer’s first Wimbledon win. In two decades from now, which stocks might have achieved similar longevity in the SAINTS portfolio? James Dow and Toby Ross pick four companies with star growth and income qualities.
This French-based business manufactures low- and medium-voltage electrical equipment to operate commercial building systems and support electric vehicle fleets. Toby Ross points to growing demand globally for both electric vehicles and more energy-efficient buildings and infrastructure. “When we think of businesses sitting ‘on the right side of history’ over the coming decade, Schneider is right there,” he says.
One growth area is ‘open architecture’ software that works with other systems, enabling managers to run buildings more energy-efficiently. “The company has strong relations with the people designing and managing buildings day to day,” Ross adds. “It’s a very highly respected, top-quality niche business-to-business brand.”
Recent years have seen unremarkable profit growth. However, the SAINTS team thinks this will accelerate, as Schneider is in the right part of the market and has the right approach. Importantly, it has also shown determination to grow its dividend. “At 2 per cent the yield is only average today, but we expect the dividend to grow over the next five or ten years as the company’s growth speeds up and its resilience increases,” says Ross.
James Dow expects battery-based electric vehicle (EV) production to grow exponentially over the coming years in the face of environmental concerns, and demand for lithium – the key component in EV batteries – to rise with it. Albemarle, a US-based company that pays a 1 per cent yield, is SAINTS’ choice to exploit that opportunity.
“Albemarle’s lithium resource in Chile and Australia is the world’s largest, but also the most expandable in production terms,” comments Dow. “Moreover, the company has a huge amount of experience in production, particularly of the very high-purity grade needed for electric vehicle batteries.” That’s proving an attractive proposition for battery producers as they allocate contracts.
SAINTS’ investment case is based on increasing demand for lithium driving profit growth, but Dow believes it’s also likely the element’s price will rise as demand outstrips production. “Either way, Albemarle is committed to growing its dividend as profits grow,” he adds.
NetEase is “better than its competitors”, Dow says
This Danish pharmaceuticals business yields 2 per cent and has pioneered diabetes treatments for almost a century, driven by a powerful research ethos. It is supported by its own medical foundation, which, as Ross observes, enables it to take a multi-decade view.
“Novo starts in a different place from its competitors,” he says. “It’s a strongly science-led organisation and views its purpose as fighting diabetes and effectively treating as many people as possible worldwide, rather than maximising profits.”
The company is currently launching a new generation of oral drugs targeting type one diabetes but has also been investing heavily for many years in treatments for obesity, a massive and growing global problem that presents this acknowledged leader in obesity treatment with an opportunity stretching into the next decade and beyond.
“We like the fact that Novo has been investing patiently for a long time and that it is tapping into a large, unmet need. It gives us confidence that both business and dividend growth will continue,” Ross observes.
NetEase is one of the top video game producers in China, and the SAINTS managers anticipate growing demand for the kind of high-quality video games it produces over the coming decade.
NetEase is “better than its competitors”, Dow says – and not just because of its 20-year history. Designing and marketing a successful video game is very challenging, and NetEase employs the talent to be one of the few companies able to carry it off. Its games are so appealing that it has begun scoring hits outside China as well as in its home market – a rare achievement. Importantly, the company has also proven itself capable of navigating the regulatory environment in China over the years, sensitive to government concerns that gaming needs to be enjoyed in moderation.
“NetEase pays less than a 1 per cent yield at present, but on a 10-year view we expect massive capital appreciation and dividend growth coming through,” says Dow. “As a capital-light software company it generates a lot of excess cash, and the founder believes in paying some of that out as dividends rather than hoarding it. So we think the stars are aligning despite the low current dividend payout. In 10 years, we could see a 5 per cent yield.”
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