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Dividend growers: The secret sauce of sustainable growth
Winnie Kwan
Equity Portfolio Manager
Chitra Gopal
Equity Investment Analyst
Ben Lin
Investment analyst
December 13, 2022

Not all dividends are created equal. At Capital Group, we go to great lengths to study the quality of dividends and uncover dividend compounders, bond proxies and cyclical winners.


In this paper, our investment professionals explain why 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.


In a dividend growth strategy, one should expect to find companies that are growing. Their management should exercise good capital allocation discipline and enable dividend payments to reward shareholders. Companies that generate rising stream of free cash flows can guard against inflation. And those with healthy return on invested capital (ROIC) tend to do better than the overall market over time (chart below (LHS) – dividends generated better ROIC against value over the period of analysis).


Return on invested capital (%)

MSCI chart

EBITDA margin (%)

d7 EBITDA

Past results are not a guarantee of future results.
Data for MSCI AC World Indices from 31 December 2002 to 31 December 2022. Return on invested capital is a profitability calculation that measures the earnings acquired after tax but before interest is paid relative to invested capital. EBITDA (earnings before interest, taxes, depreciation and amortization) margin is an indicator of financial condition and measures operating profit relative to revenue. Sources: FactSet, Capital Group

Capital Group’s analysis shows dividend growers – stocks that pay and consistently grow a dividend – have typically been higher quality firms with solid fundamentals. We believe dividend-focused strategies could provide a more resilient outcome compared to value portfolios. This is because dividend growers tend to have higher earnings and dividend growth potential compared to value stocks.


Uncovering dividend growers is not easy and quantitative screening alone is not enough. This is where fundamental research matters even more in finding companies with the capacity and willingness to commit and grow their dividends.


 


Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
  • Risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.

Winnie Kwan is an equity portfolio manager at Capital Group. She has 26 years of investment industry experience and has been with Capital Group for 23 years. Prior to joining Capital, Winnie worked with Morgan Stanley in London, Hong Kong and Singapore. She holds both master’s and bachelor’s degrees in economics from Trinity College at the University of Cambridge. Winnie is based in Hong Kong. 

Chitra Gopal is an equity investment analyst at Capital Group with research responsibility for the Asian technology sector, as well as European and U.S. semiconductor equipment. She has 20 years of investment industry experience and has been with Capital Group for eight years. Prior to joining Capital, Chitra worked as a research analyst at Nomura and CLSA. She holds a bachelor’s degree in electrical and electronics engineering from Nanyang Technological University, Singapore. She also holds the Chartered Financial Analyst® designation. Chitra is based in Singapore.

Ben Lin is an investment analyst at Capital Group, with research responsibility for the Asia machinery, construction, engineering and electrical equipment sectors, as well as Asia insurers. He has 17 years of investment industry experience and has been with Capital Group for six years. Prior to joining Capital, Ben worked as an equity analyst at Morgan Stanley. Before that, he was an equity analyst at Nomura. He holds a bachelor’s degree in commerce from Macquarie University, Sydney. Ben is based in Hong Kong.

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Past results are not predictive of results in future periods. It is not possible to invest directly in an index, which is unmanaged. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.

Capital Group manages equity assets through three investment groups. These groups make investment and proxy voting decisions independently. Fixed income investment professionals provide fixed income research and investment management across the Capital organization; however, for securities with equity characteristics, they act solely on behalf of one of the three equity investment groups.