How do you track down the best income shares? Look for the opportunity for dividends to grow, is the case put forward by fund manager Hugh Yarrow.
Hugh, the manager of the Evenlode Income fund, explains the thinking behind his Dividend 20:20 – Ten dividend growth stocks for the next five years screen in the latest episode of the Investing show.
He highlights why free cashflow and a high and consistent return on capital are the things share-pickers should look out for when sizing up income stocks.
Hugh joins Simon Lambert, editor of This is Money, in the studio, along with Richard Hunter, head of equities at Hargreaves Lansdown, and Nick Batsford, CEO of TipTV.
This fortnight’s show also features a look at housebuilders and whether they are still worth buying or holding after their steller run – and at what a prolonged oil slump would mean for investors.
Dividend 20:20 – Ten dividend shares for the next five years
By Hugh Yarrow, Evenlode Income fund
A well-diversified portfolio of global health, hygiene and homecare brands selling repeat-purchase products. Brands include Dettol, Finish Long-term potential in emerging markets is excellent, and now represents more than half of the company’s sales.
One of the UK’s strongest international fashion brands with plenty of international growth potential, and a strong online presence.
Sage is the global market leader in the provision of enterprise software for small and medium-sized businesses. It sells to more than 6m customers in 160 countries. Its products, such as accountancy software, become embedded in the day-to-day running of a business, creating a consistent revenue stream from subscription and support contracts. This revenue is growing steadily and now makes up almost three-quarters of sales. The company routinely converts profit to cash-flow and as well as the historic growth in ordinary dividends, special dividends have been a feature in the past.
Spectris makes devices and systems that help other manufacturers and producers to become more efficient. It is a global leader in its niche market, with plenty of potential for growth over coming years.
A mid-sized consumer branded goods company with a brand portfolio including Imperial Leather, Carex and Cussons Baby. Good potential for growth in emerging markets long-term, particularly thanks to market leading positions in Africa and Indonesia.
Weathering the storm: International fashion brand Burberry is one of the stocks on the screen – it has enlisted Romeo Beckham to help promote itself
Euromoney is a business-to-business media company, providing research, data and events primarily to the financial and commodities sector. Brands include Euromoney, Institutional Investor and BCA Research. Subscription based products, many of which are digital, make up more than 50% of revenue.
Market leading UK engineering consultancy, with strong positions overseas including a US, Middle Eastern and South East Asian business. Strong balance sheet and very high free cash flow cover supports a progressive dividend policy.
One of the highest quality mid-cap franchises in the UK market, Rotork sells mission-critical products in industries that require the control of liquids and fluids (such as power, water, oil and renewables). Its highly cash generative business model and strong balance sheet equip it well for paying sustainable dividends, and special dividends have been a feature for investors on top of this ordinary payment.
Not on the face of it a terribly exciting stock. A specialist distribution business, the group operates in three main areas – life sciences, industrial seals and electronic controls. Diploma is the business you turn to when you need anything from a replacement part for your dump truck’s hydraulic cylinder to a chemical reagent for a diagnostic blood test. However, these businesses, while dull, operate in very niche markets which Diploma has come to dominate over the years.
A payment technology company, helping consumers pay utility bills, top up mobile bills, pay tax buy parking tickets and send parcels. Paypoint’s network of yellow boxes spans more than 28,000 retailers across the UK. The business has limited capital requirements and its strong balance sheet and free cash flow supports a healthy dividend yield. Management takes a pragmatic attitude to returning excess cash to shareholders and along with growth in ordinary dividends, special dividends have been a feature in the past.
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