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A Remarkably Powerful Dividend Strategy

I recently came across a curious investing strategy implemented by a mutual fund (the equivalent of a unit trust here) in the USA called the Goldman Sachs Rising Dividend Growth Fund. The fund’s investment strategy is simple – where companies are selected based on only two criteria – and yet remarkably effective.

As of the end of Nov 2013, the fund has given total annualised returns (inclusive of reinvested dividends) of 8.71% since its inception on 23 March 2004, outperforming the S&P 500 (a broad American stock market index) by 1.2 percentage points a year.

So, what the fund does is to identify companies based on a 10/10 test where 1) they must have a minimum 10-year track record of consecutive dividend increases, and 2) they must have grown their dividends by at least 10% per year on average.

For me, the track record of the fund and its existence raises two important points for investors to consider.

Importance of growing dividends

The first is the importance of growing dividends. I chanced upon the Rising Dividend Growth Fund from an article written by my American colleague Brian Richards back in 2011 titled A Crazy-Simple Dividend Strategy You Should Seriously Consider. In the article, Brian mentioned a study done by financial research publication Ned Davis Research that showed how dividend growers and initiators had beaten other types of shares by a massive margin.

Meanwhile, American corporate giants like Pfizer, Johnson & Johnson, Coca-Cola, and Altria have also delivered tremendous multi-bagger returns for their shareholders over the last four decades in no small part due to their consistently growing dividends.

Simple, wins

The second point investors should consider is how simple investment strategies often win. At the end of 1980, an unknown investment manager by the name of Edgerton Welch had led the Citizens Bank & Trust Company’s fund to the third-best 10-year record among equity funds in the USA with an 11.9% annualised return.

How did Welch do it? He only invested in stocks that are highly regarded by all three sources simultaneously: the weekly stock market research publication, the Value Line Investment Survey; and brokerages E.F. Hutton and Merrill Lynch, Pierce Fenner & Smith Inc. It was that simple. 

In an interview with Forbes Magazine in 1981, the year his fund topped the list of best-performing funds for the decade, Welch told the publication’s reporter that he did not even know who Benjamin Graham was! But Welch’s simple investment approach still brought him great success, nonetheless.

The 10/10 test here

Coming back to the 10/10 test, among the 30 blue chips here in Singapore that make up the Straits Times Index (SGX: ^STI), there was only one company that came through the screen. The conglomerate Jardine Matheson Holdings (SGX: J36) had grown its dividends by an average of 16.2% a year and this how its dividend history looks like:

Jardine Matheson Holdings

Year

Dividends

2002

US$0.30

2003

US$0.33

2004

US$0.40

2005

US$0.45

2006

US$0.50

2007

US$0.65

2008

US$0.75

2009

US$0.90

2010

US$1.15

2011

US$1.25

2012

US$1.35

Source: S&P Capital IQ

There was one other company that came close to the mark. Jardine Cycle & Carriage (SGX: C07), corporate cousin of Jardine Matheson Holdings, had grown its dividends by 30% a year on average, but its dividend dipped slightly in 2003 and was stagnant in 2012.

Jardine Cycle & Carriage

Year

Dividends

2002

US$0.09

2003

US$0.0872

2004

US$0.10

2005

US$0.18

2006

US$0.20

2007

US$0.43

2008

US$0.50

2009

US$0.58

2010

US$0.98

2011

US$1.23

2012

US$1.23

Source: S&P Capital IQ

Foolish Bottom Line

To be certain, this is not meant as a criticism of the other blue chips. After all, the other Straits Times Index constituents with uneven dividend records like Keppel Corporation (SGX: BN4) and Singapore Exchange (SGX: S68) have also been fabulous long-term winners, giving total returns (capital gains plus gains from reinvested dividends) of some 1,064% and 1,158% respectively since the start of 2003.

In any case, the 10/10 test created by the Goldman Sachs Rising Dividend Growth Fund can be a very useful toolkit to have in every investor’s arsenal.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.