Last year countless high-yielders, from high street retail chains to oil producers, were forced to cut or cancel their dividend distributions. Income seekers focusing on high yielding stocks lost out because they’re looking backwards, not forwards. 
Income investors are often funding a 30-year retirement or a financial goal which lasts decades – not a single year. They need to align their mindset with this time horizon and find long-term income, not short-term yield.
A growth approach to income asks investors to look forwards, not backwards. It advocates embracing companies with bright futures – companies that are reinvesting appropriately in their business and paying lower but sustainable dividends.
Sources of long-term dividend growth
What is most exciting for income investors is that we are living in a golden age of opportunity to buy companies with years of growth still ahead of them. Consider the following examples as sources of growth:
• Continued improvements in computing power and algorithms promise new ways to extract revenue and cost savings by learning from large datasets
• The fight against global warming is creating unimagined opportunities in many fields
• Homeworking through the Covid-19 pandemic has opened our eyes to new ways of communicating more efficiently
• Incomes could continue rising at a healthy pace for many years in China, a country with a population twice the size of Europe and the US combined
Once an investor embraces the new paradigm for income, focusing on long-term dividend-growth by searching for companies like Microsoft, rather than wasting their time on business models of yesterday like coal or big oil, a huge universe of opportunities opens up.
Suddenly they can embrace opportunities such as package delivery businesses in an era of online shopping; healthcare companies in a time of biological discovery; semiconductor design firms in the age of Industry 4.0; and Chinese companies of all shapes and sizes in that vibrant economy.
Seizing these opportunities requires investors to look beyond the narrower confines of the UK market. On a global perspective, there are more than 4,000 dividend-paying companies of a size that is suitable for the investor in search of the next Microsoft.
Stock-picking for dividend growth
There is no magic recipe for finding dividend-growth companies with rising and resilient dividends. However, there are three high-level questions that we find useful:
Is the future exciting or problematic for the company?
Looking forward for the next 10 years, we ask ourselves whether we see opportunities or threats. As a result, our holdings include:
• Albemarle, the world’s largest and lowest-cost owner of lithium for electric vehicle batteries
• Netease, owner of several of the most popular gaming, music and education franchises in China
• Novo Nordisk, the leading innovator in diabetes treatment
• Schneider Electric, manufacturer of efficient electrical equipment and automation software
• TSMC, the leading-edge producer of semiconductors globally
• UPS, the package delivery company with a global network serving online businesses
We believe these companies will see growing demand for their products. And we see unique competitive advantages, which will enable each of them to make healthy profits from their investments and pay long-term dividends.
Does the company have a great management team embracing the opportunity?
It is one thing for a company to have an exciting growth opportunity, it is quite another to execute on that opportunity. Great management teams improve the odds of growing dividends immensely; among the examples here are:
• Admiral, the UK car insurance company, where the management team obsesses over customer and employee satisfaction
• Atlas Copco, the Swedish industrial tools manufacturer, whose unique management culture is built on empowering employees to find ways to grow the business
• Anta Sports, the Chinese sportswear company, whose young founder-owner has already built a brand to rival Nike in China
• Fastenal, the American industrial parts distributor, where the founder’s mantra of “growth through customer service” still flows through the company
• Kering, the French luxury goods company, whose family has provided long-term focus and where management embrace the future
• Silicon Motion, a leading Taiwanese supplier of integrated circuits, whose founder is every bit as driven today as when he founded the company 25 years ago
In a world where the average CEO tenure is embarrassingly short, long-term investors are typically better off aligning themselves with great management teams who stick around for years.
Will the dividend be resilient, whatever the world throws at it?
Dividend resilience needs to be evaluated company-by-company. Dividends are ultimately board decisions, dependent on the unique circumstances at the company. Each one has a different cyclicality, pay-out ratio, and debt profile – all factors which influence dividend resilience in difficult years. The global economy experiences traumatic shocks every so often and only careful stock selection will ensure dividends are resilient through those times.
The old paradigm in income investing, which focused on troubled high-yielders, can now be cast into history. A new approach, based on growth and resilience, has demonstrated its benefits and should continue to bear fruit in the years to come.
James Dow is joint manager of Scottish American Investment Company. The views expressed above are his own and should not be taken as investment advice.