Be on the lookout for dividend special situations – these are companies that can be expected to become sustainable and consistent dividend payers owing to a change in either their business conditions or their capital allocation policy. European telecoms companies whose payout ratios are benefiting from a relaxation in strict regulation also fall into the first category.
In terms of a change in capital allocation policy, investors should keep a keen eye on companies that have temporarily suspended their dividend owing to an increase in capital expenditure, such as sausage skin maker Devro. These companies tend to be punished by a market hungry for income, which creates significant buying opportunities.
More broadly, the change in capital allocation policy in Japan as a result of prime minister Shinzo Abe’s third arrow is producing many opportunities for income investors looking for dividend growth at the right price.
Dividend aristocrats remain an important tool for income investors, but holding them in high volume is not without its risks, despite their strong performance in recent years.
There will be a time when they are more attractively valued as a group, but at this juncture, focusing on dividend growth at the right price gives investors the best chance of attaining dividend growth and a strong total return.
Joshua Ausden is head of client investment strategy at Neptune Investment Management
