The dividend hero shares fund managers are backing for the long term

Cherry Reynard asks seven of interactive investor’s Super 60 fund managers to name their favourite ‘dividend hero’ share. 

The recent market volatility has reminded investors of the value of dividends. They provide the reassurance of cash today, rather than the more unpredictable charms of capital growth tomorrow. The problem, however, is that dividends can be withdrawn at a moment’s notice if a company suffers a bad patch – as shown during the pandemic.

One tactic to attempt to reduce risk is to gravitate to those ‘dividend heroes’ with a track record of paying dividends through thick and thin.

The beauty of a dividend hero is that investors don’t have to think about it too much. They don’t have to worry that it will be hurt by a weakening economic environment or a change in the business climate. They can invest, sit back and let compound growth work its magic. If a company can grow its dividend over time, it also protects against inflation, which is likely to become increasingly important over the next few years.

When they have found these unique investments, investors have to hold their nerve. Bruce Stout, manager of Murray International (LSE:MYI), says: “Holding on to a good investment requires patience, foresight and the ability to look beyond constant market noise, short-term price fluctuations and oscillating sentiment. Above all, it demands constant constraint on the ever-present, human fallibility of always feeling the need to be “doing something”.

He is one of seven of the interactive investor Super 60 managers who has picked out a dividend hero below.

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Non-cyclical shares favoured

In general, these stocks will be largely insensitive to the economic environment. That tends to rule out luxury goods, autos, travel, leisure or anything that relies on households and businesses having plenty of spare cash. The heroes will often be geared into a structural trend that allows them to sustain and grow profits (and therefore dividends) over many years.

James Milne, manager of the TM CRUX European Special Situations, cites SGS (SIX:SGSN), a Swiss-based testing and inspection company that the fund has held since 2015. It has for many years either raised or held its dividend.

Milne says: “SGS benefits from increasing regulation, as it is paid by clients to ensure products meet certain standards - the paint used in toys does not contain lead, mined material contains specified amounts of certain minerals, or food in China meets local standards. These secular trends have resulted in over 5% annual sales growth over the long term.”

That sales growth has been generated whatever the economic weather, points out Milne.

The company has two other key qualities for the perfect dividend stock: a committed management team and a strong balance sheet with little debt. Milne adds: “Management have been generous with shareholder returns over the years, mainly paid in dividends but also supplemented with share buybacks.”

A share that’s proven its worth

Unilever, Lindsell Train UK Equity manager Nick Train’s pick as a dividend hero, has also proved its credentials over the years. Train says that Unilever (LSE:ULVR) has successfully exploited its global distribution, its marketing skills, the knowledge it learns about changing consumer tastes and the billions of pounds of annual cash flow it generates from its brands. It uses all these attributes to develop or acquire new brands. Those brands have shown real resilience in the face of a range of market conditions – people still buy Domestos, Dove or Hellmann’s mayonnaise.

It has also managed to defy those who thought it would be undone by the march of e-commerce. Alan Jope, the firm’s chief executive officer, recently said: “It is a myth that the infinite shelf space of e-commerce favours middle and small-sized brands. E-commerce is very favourable to relevant big brands; they get first on the search and shopping list.”

The Lindsell Train stablemate – the Japanese Equity Fund - picks a company with similar characteristics in Japan. Founded in 1887, Kao is a manufacturer of hygiene, beauty and health products, which operates alongside its chemicals business. It has a presence in the Americas, Europe, Middle East and Africa and even owns brands familiar to UK consumers, such as John Frieda and Molten Brown.

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Infrastructure is a powerful defensive trend

Kirsty Desson, manager of the abrdn Global Smaller Companies fund, also picks a Japanese company as her favourite dividend hero share. Desson holds Sho-Bond, a Japanese company specialising in the repair and maintenance of infrastructure in Japan.

She adds: “The company has a high degree of revenue visibility thanks to its strong order backlog and the Japanese government’s commitment to maintain and upgrade infrastructure under the National Resilience Programme and Expressway Renewal Project. Spending for each programme is scheduled to last between five and 15 years.

“In addition to the supportive industry backdrop, the company has enhanced profitability through continuous internal improvement in the deployment of staff, managing large scale projects and prioritising certain orders.” In common with other dividend heroes, it also has a strong balance sheet and cash flow.

Infrastructure has been a powerfully defensive trend and one of the few bright spots in an otherwise gloomy start to the year for stock markets. It is a natural choice for dividend investors, with predictable, inflation-adjusted cash flows. At the same time, governments are directing increasing amounts of capital towards infrastructure projects with the aim of improving productivity, replacing creaking systems and facilitating the energy transition.

Smaller company dividend play

While a ‘dividend hero’ often conjures up a solid, reliable company that is, perhaps, also a little dull, this doesn’t have to be the case. Neil Hermon, portfolio manager on the Henderson Smaller Companies (LSE:HSL) investment trust, picks Oxford Instruments (LSE:OXIG), a manufacturer of advanced instrumentation equipment, which services a number of high-growth industries such as semiconductors, quantum computing, life sciences and advanced materials.

He says: “These markets are seeing strong growth and, given likely future demand, may lead to Oxford growing its turnover at a double-digit rate. In addition, its ‘Horizon’ programme of business improvement is driving profit and margin growth. The company benefits from a very strong balance sheet enabling it to add complementary acquisitions to boost organic profit growth. In addition, as evidenced by the recent takeover approach from Spectris (LSE:SXS), Oxford is a rare, valuable asset which could see further corporate interest, particularly from a larger foreign predator.”

Double-digit growth for emerging market share

These heroes are not confined to developed markets. Bruce Stout, senior investment director and manager of Murray International, picks Grupo Aeroportuario del Sureste (NYSE:ASR) (Grupo Asur), a portfolio holding for more than 20 years. He adds: “Throughout this period, dividends from the company have compounded at double-digit growth rates as expanding profitability has been shared between rewarding shareholders and capital investment needed to grow the business.

“As the sole airport operator of Mexican holiday destinations Cancun and Cozumel, Grupo Asur is uniquely positioned to benefit from ever increasing passenger growth to the region, enjoying ‘captive’ customers in its constantly expanding facilities.”

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Revenues streams for the group include rentals from Airport Terminal retailers, car-rental and car-parking fees, plus rentals and royalties from duty free, advertising, food & drink outlets and ground support services. It’s also got the familiar strong balance sheet and it is expanding into other tourist destination airports such as Colombia and Puerto Rico.

Flexibility key to go the distance

Finally, any business that is going to last the distance needs to show some flexibility. Times change, technology changes and businesses need to adapt. Job Curtis, portfolio manager on the City of London (LSE:CTY) investment trust, picks publishing group RELX (LSE:REL) which has successfully transformed its operations from being print-based to almost completely digital.

“The key to the investment case for RELX is the consistency of organic growth from its three main divisions - scientific, technical and medical; risk and business; plus legal. As a result, RELX has grown its dividend by some 11% per annum over the last 10 years. In addition, its smallest division, business exhibitions, has significant recovery potential as people are more willing and able to travel.”

Amid the current turmoil, companies that can grow its dividend year after year are likely to be increasingly prized by investors. These heroes will never have the short-term appeal of a racy technology stock, but they are the reliable backbone of any portfolio.