“Big Tech” received a lot of attention in 2023, but we don’t believe it’s the only sector with attractive investment ideas offering the desired capital return characteristics. The time for dividend champions is back!
Dividend champions have attractive free cash flow profiles – high and growing; exhibit intelligent capital allocation; and have a long-term focus on the sustainability of its market position. High free cash flow-yield stocks have generally outperformed over the long term and we believe investors should be considering a portfolio of dividend champions again.
What does a dividend champion actually look like?
TSMC continues to invest heavily into the business, but its capital allocation process has evolved as its scale has given it a competitive advantage and it has focused more on capital return. The dividend growth rate has been an impressive 15% annualised over the past decade. The company has said it expects this to grow in line with free cash flow going forward.
Not everyone has heard of Inditex4, but almost everyone will be familiar with its main brand, Zara. Inditex is the largest fashion retailer in the world5. The company pioneered a nearshoring model which allows it to operate with shorter product lead times, quickly reacting to trends and running leaner inventories.
Having pulled back on shareholder returns during the pandemic, this year’s dividend could be up to 60% higher than 20196.
These are just two examples of the sort of firms we look for. And as 2024 begins we will continue to research and analyse the market for similar quality businesses.