After an extraordinarily challenging year for income investors, the annual Evenlode Global Dividend Sustainability Report reveals its list of ten companies poised to deliver reliable income streams over the next five years.
It also reviews last year’s selection of companies, which despite experiencing a 4.3 per cent fall in dividend growth, showed notable resilience compared with the 8.8 per cent decline for the companies that make up the MSCI World Index in 2020.
The index, compiled by Ben Peters and Chris Elliott, portfolio managers of the TB Evenlode Global Income Fund, aims to identify quality compounding companies with resilient cash flows at attractive valuations. The duo select ten companies with business models that enjoy market-leading positions in their industries, attractive economics, good cash flow, strong barriers to entry, and good potential for medium-to-long-term growth.
The 10 companies’ performance is re-assessed yearly to re-establish their inclusion in the list. This year, just one company has been changed, highlighting Evenlode’s process of locating high-quality, cash-generative businesses, and focus on long-term sustainable income stream.
“The last year has proven to be quite unlike any other experienced by dividend-seeking investors,” Ben Peters explains. “Our list of companies aiming to deliver sustainable and growing dividends was not immune, with one of the ten companies, Bureau Veritas, cancelling its dividend.”
Although Bureau Veritas, the French testing, inspection and certification business, cancelled its dividend early in the pandemic, Peters reiterates “if a company can’t afford to pay a dividend, then it shouldn’t. If a good business needs to conserve capital through a time of crisis then it should cut its dividend if it pays one.”
It certainly hasn’t all been doom and gloom however – the remaining nine companies in Evenlode’s 2020 list have either maintained or increased their dividends through the pandemic, demonstrating a great deal of resilience in the face of adversity. Peters goes on to explain, “the index has been powered on more by the big winners of the pandemic, specifically large technology companies that have benefitted from the accelerated trends towards digitisation, remote working and collaboration, and home shopping.”
According to co-manager, Chris Elliott: “The stability of the sustainable dividend list will continue to provide superior and lower volatility returns in the long run. One of the benefits of a sustainable income stream is that one is ‘paid to wait’ for the underlying economics of a good business to do their work.”
This investment philosophy continues to ring true this year, as Evenlode’s 2021 list features just one company change from the previous year: switching out PepsiCo for Nestle. While the two companies are both high-quality businesses with similar yields, the duo note Nestle’s larger cash flow as an important buffer against potential uncertainty.
Elsewhere, the list remains predominantly the same, retaining global mainstays such as Unilever, Johnson & Johnson and Cisco. Despite feeling the impact of lockdown and furlough, Paychex, a US-focused provider of human resources, and Relx, the Anglo-Dutch media conglomerate, both hold their positions in this year’s list. Elliott says “the underlying long-term resilience of the businesses and their cash generating ability means they retain their places in the list.”
Peters says: “The recent past has been a reminder that no approach to investing works perfectly over shorter time periods, however our list has delivered positive returns in absolute terms over the last year.
“With good corporate fundamentals, we believe the overall risk profile for the sustainable dividend list is lower than for the market. Over the long run, the stability of the sustainable dividend list continues to provide superior and lower volatility returns.”