Hello, dear readers of Cambridge View Capital. Today, we're diving into an insightful paper from Capital Group that highlights the potential advantages of investing in dividend-growing companies. These companies offer more than just income during challenging times; they can add significant value through long-term real return generation, making them an essential ingredient for diversified portfolios.
Link to the excellent report here: https://www.capitalgroup.com/intermediaries/sg/en/insights/articles/dividend-growers-the-secret-sauce-of-sustainable-growth.html
A New Era of Investing
The global financial crisis of 2008 and the COVID-19 pandemic in 2020 have significantly influenced the market environment. With the return to a more normalised environment, dividend contribution to total return could become more relevant.
Investing in companies that are growing, have good capital allocation discipline, and reward shareholders with dividend payments is a promising strategy. Companies that generate a rising stream of free cash flows can guard against inflation. Those with healthy return on invested capital (ROIC) tend to perform better than the overall market over time.
Key Trends Shaping Today's World
Several major trends are shaping the world today, including the development of artificial intelligence and energy-efficient computing, and the shift towards decarbonisation. These trends span a wide range of use cases, from drug discovery and fraud detection to predictive maintenance and the retooling of energy grids to accommodate more renewables.
The Power of Dividends
Not all dividends are created equal. Capital Group's investment professionals go to great lengths to study the quality of dividends and uncover dividend compounders, bond proxies, and cyclical winners.
For instance, Midea Group, a manufacturer of electrical appliances, has transformed its business model to made-to-order production, becoming less working capital intensive. This transformation resulted in significant free cash flow generation, allowing Midea to redistribute cash for growth and reward shareholders in the form of dividends and share buybacks.
The Role of Management
The eventual success of a company depends on its management. It takes time to establish long-term relationships with generations of management teams. Engaging the management on topics like dividends versus share buybacks can take years, but it's a crucial part of understanding a company's potential for growth and dividend payouts.
As uncertainty remains due to monetary tightening and high levels of inflation, dividend-income investment opportunities could play a more important role in contributing to the total return of an investment portfolio. Investing in dividend-growing companies can provide more advantages besides simply offering income in tough times. It has the potential to add value through long-term real return generation, making it an essential ingredient for diversified portfolios.
Stay tuned to Cambridge View Capital for more insights on investment strategies and market trends.
If you have any more questions about the document or need further clarification on any points, feel free to ask!