How Dividend Growth Investing outperforms Dividend Investing
Bristol Gate’s investment strategy is built on buying businesses that are poised to substantially grow their dividend over the next 12 months and beyond. Where many dividend investing strategies focus on the current dividend yield, we are current yield agnostic in our stock selection.
Many of our holdings were purchased at a current yield below the S&P500 average. These stocks would almost immediately be excluded from consideration in many dividend strategies that screen for companies with higher than market yield.
Bristol Gate’s holdings’ average current yield at time of purchase is 1.30%. Interestingly, the current yield of the portfolio as of June 30, 2020 is still roughly 1.30%. What does this tell us about what drives our portfolio outperformance?
The Bristol Gate US equity strategy targets 15% annualized dividend growth per year. The strategy has achieved a rate of 20.9% dividend growth since inception as of March 31, 2020. By definition, in order for our portfolio’s current yield to have remained the same over this period with such substantial dividend growth, the capital value of the portfolio appreciated to reflect dividend growth over time.
Entering positions at a low current yield with substantial dividend growth allows our portfolio to achieve higher yield on original cost than many current yield-seeking strategies. A dividend growing at 15% doubles your income on cost in just 5 years.
Current dividend yield only tells a fraction of the story for a security or portfolio. While high yielders may look enticing on the surface, these companies are often more mature, in less stable industries, or are predicted to have slower earnings growth compared to high dividend growers. Evidently, high yielding stocks may not be the safest investment to make.
Looking under the hood of a dividend strategy and current yields – at dividend growth rates – paints a clearer picture of the health of the businesses in a dividend-centered investment strategy.
Disclaimer: This 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, and 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. 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 www.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.