One strategy for constructing a long-term portfolio of shares involves focusing on the shareholder dividends companies pay. If I collect a large yield in income and plough the proceeds back into my shares, I’ll be compounding my investments.
Another benefit of focusing on the shareholder dividend is that big yields often indicate a modest valuation. So, if the annual dividend grows over time, there’s a good chance the share price will also rise and deliver capital growth in my portfolio as well.
However, the strategy works best if I target sustainable dividends. So, I’ll avoid cyclical businesses and look for firms with strong finances operating in a profitable niche of the market, such as these three.
The recent bout of general stock market weakness has pushed down the share price of pharmaceuticals giant GlaxoSmithKline (LSE: GSK). It seems the company is out of favour with investors. One reason for that could be a general rotation out of defensive companies and into cyclical stocks that look poised for the next cyclical up-leg.
Indeed, although the likes of GlaxoSmithKline do operate cash-producing, defensive businesses, their valuations can move up and down in cycles. And right now, I think the valuation has cycled down.
And at the current share price near 1,350p, the dividend yield is just below 6%. Meanwhile, nobody expects much growth in earnings in the near term. But I do reckon the firm can keep up its dividend payments. For me, GlaxoSmithKline would make a decent long-term hold in my portfolio.
National Grid (LSE: NG), has a forward-looking dividend yield of just over 5% for the current trading year to March 2021. The guardian of the nation’s gas and electricity transmission networks has been a steady dividend payer for many years. And it’s clear the firm’s highly regulated monopoly position in the UK’s energy sector endows the business with defensive qualities.
The company also has operations in the US. And although National Grid carries a big debt load, the rock-solid cash generation it achieves makes sense of the high level of borrowings. However, the business requires large and continuous amounts of capital investment. And the directors must balance the cash flow returns to the company’s lenders and to its shareholders.
I don’t expect the business to ever shoot the lights out with growth. But I do think it’s capable of churning out those generous shareholder dividends for years to come.
The food sector has defensive qualities and Tate & Lyle (LSE: TATE) is a big player in it. The company produces ingredients and solutions to the food, beverage and other industries, and it’s a lucrative market. We can see by the firm’s long record of paying generally rising shareholder dividends how well the cash keeps rolling in.
The share price has slipped back a bit this autumn and now stands near 612p. At that level, the forward-looking dividend yield for the current trading year to March 2021 is a little below 5%. Meanwhile, the company has already shown its resilience by trading well through the recent coronavirus lockdowns.
So, I’d treat a holding in the firm’s shares now as a sleep-at-night investment. And I’d hold with the tenacity of a business owner for at least the next 20 years.
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020