Real wage growth in Canada has been stagnant over the past 30 years. After inflation, Canadians have been struggling to increase their income year-over-year, making it increasingly difficult to get ahead. Additionally, interest rates have been steadily declining throughout this same period, making it less efficient to supplement the lack of income growth through traditional avenues. Canadians need an investment product which addresses the issue of income growth head on. At Bristol Gate, we believe this is best done by identifying businesses that have the ability and desire to increase their dividends at a very high rate looking 12 months forward.
In the market we often see investors searching for opportunities within two large segments: high growth and high yield. While both serve their purpose, neither can be relied on to increase an investors income each year. What we have uncovered is an underappreciated piece of the market that resides between these two larger categories, high dividend growth.
Although the current yield of these stocks may be lower than the market average, it is here where we are able to source incredible businesses that are focussed on growth while also distributing profits back to shareholders. These are inherently high-quality names, demonstrating high returns on invested capital, increasing free-cash-flows, and favourable capital structures on their balance sheets. Finding businesses that are committed to growth, of the bottom-line and dividends, without the use of excessive leverage or financial engineering has historically served investors well.
The chart below illustrates that if you had the hindsight to invest in the best dividend growth stocks (“Top Quintile”) in the S&P 500 over the past 20 years then you would have the most attractive risk return profile. The 20-year period referenced is from Jan 1, 2000 to Dec 31, 2019 where each theoretical portfolio presented for the stated category was constructed from an equal weight basket of stocks selected from the S&P 500 universe and reconstituted annually.
At Bristol Gate, we manage a concentrated US Equity portfolio and a concentrated Canadian Equity portfolio comprised of stocks with the highest dividend growth at the highest quality. As Canadians are hungry to increase their income, we believe our strategies are a tremendous compliment to every portfolio. Our US Equity Strategy, since inception in 2009, has delivered an annualized Dividend Growth rate of ~20%, and our Canadian Equity Strategy has provided over 12% annualized Dividend Growth since its inception in 2013.
Investors in our Bristol Gate ETFs (Tickers: BGU/BGU.U & BGC) also benefit from the dividend income being automatically reinvested, increasing the value of each unit held. Reinvesting dividends is a tried and true strategy to take advantage of compounding income. We believe reinvesting a consistently growing income stream back into fundamentally strong businesses is of great benefit within a well-rounded financial plan.
There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at www.bristolgate.com/regulatory-documents.
This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at bristolgate.com.
A Note About Forward-Looking Statements
This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.
These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.