Many companies around the world resumed paying dividends last year as COVID-19 vaccines were rolled out and businesses reopened. Equity portfolio manager Caroline Randall keeps a close watch over dividend payers, but she’s especially interested in dividend growers.
“I’m very focused on companies with strong underlying earnings growth that have demonstrated a commitment to raise dividends over time,” Randall says. “Increasing dividend payouts can be seen as a signal of management’s confidence in future earnings growth.”
But can past earnings growth suggest solid return potential for investors? Consider the following hypothetical illustration.
Our interactive chart shows the returns for hypothetical $100,000 investments in three historically consistent dividend growers — McDonald’s, Nestlé and Samsung — for the 20 years ended December 31, 2021. Toggle by company and year-end results to see how those initial investments would have fared over the two decades, with all dividends reinvested.
Toggle interface available to select a company.
Toggle interface (choice one of three), Mcdonalds selected.
Toggle interface (choice two of three), Press enter to select Samsung.
Toggle interface (choice three of three), Press enter to select nessly.
Toggle interface available to choose year of the data.
Toggle interface (choice one of five), Year 2000 selected.
Toggle interface (choice two of five), Press enter to select the year 2005.
Toggle interface (choice three of five), Press enter to select the year 2010.
Toggle interface (choice four of five), Press enter to select the year 2015.
Toggle interface (choice five of five), Press enter to select the year 2021.
Sources: Capital Group, Refinitiv Eikon, Refinitiv Datastream. Growth rate calculations for value of shares from reinvested dividends and dividends paid use the first year’s dividends payment ($797) as a starting value. This information should not be considered a recommendation to purchase or sell a particular security and is provided for illustrative purposes only. As of December 31, 2021.
The chart breaks down the year-end results of the hypothetical investment into five-year increments. Looking at Nestlé, that initial $100,000 would have grown to $694,518 by 2021.
“Dividend growers historically have tended to generate greater returns than other dividend strategies, while also keeping up with the broader market,” Randall adds.
The key to those strong returns is in the reinvestment of dividends. In the case of Nestlé, reinvested dividends would have generated 36% of the total investment value, or $248,301, over 20 years. McDonald’s and Samsung tell a similar story.
Of course, not all dividend-paying companies have kept pace with the broader market, and past results aren’t predictive of future outcomes. But the illustration suggests that dividend growers may be a good option for long-term investors.