2020 has been a turbulent year in financial markets, characterised by a significant sell-off in February and March, followed by a sustained recovery. Globally, concerns around low growth, low interest rates, potential recession and intensifying geopolitics increased market volatility and threatened to dampen investment returns. This uncertainty made investors increasingly anxious about the long-term outlook of their investments.
Marriott feels this need not be the case if you are invested in quality companies – ones that offer compelling, reliable long-term returns and are generally resilient to market cycles. In particular, large, well-established, blue-chip multinational dividend-paying companies such as Unilever, Nestlé and Coca-Cola.
In the long run when investing in these types of companies, the biggest driver of capital growth is dividend growth. Thus, more predictable dividend growth means more predictable capital growth. To demonstrate this, the chart below highlights Nestlé’s impressive dividend track record through numerous market cycles and how dividend growth has ultimately driven capital appreciation.
In our opinion, quality companies such as these exhibit a number of characteristics which allow them to produce reliable and growing dividends over time with a high degree of certainty. This enables them to withstand the ups and downs of global politics and changing economics. We’ve expanded on five of these characteristics which help to ensure predictable dividend growth:
1. Fulfil a Basic Need
Fundamental to predictable dividend growth is a product offering which forms part of our day-to-day lives. From pet food and nappies to computing and digital payments, these companies offer goods and services that form an integral part of our daily lives. Due to the nature of their products, future dividend prospects are largely unaffected by changing economic conditions, technologies and trends which are difficult to predict.
2. Strong Brands
Why choose one product over another? More often than not it comes down to trust. Accordingly, Marriott only invests in companies with strong brands. Coca-Cola, for example, controls approximately 50% of the carbonated soft drink market, and Diageo is dominant when it comes to the spirits market. Customer loyalty created by strong brands keeps competitors at bay, ensuring reliable dividends. With a global footprint, these companies are best able to capitalise on long-term trends such as consumerism, ageing demographics and the fourth industrial revolution.
3. Pricing Power
These companies are market leaders in their industries and have the best quality, strongest branded products that are integral to the lives of their customers. This gives them strong pricing power – the ability to increase prices without losing customers.
4. Growing Markets
Growing markets are very important for dividend growth. Consequently, many of Marriott’s international equities have meaningful exposure to emerging economies.
Driven by economic growth in emerging markets, approximately a quarter of a million people join the middle class every day (Source: Boston Consulting Group).
This is very positive for the dividend and capital growth prospects of consumer-facing multinationals with meaningful footprints in the developing world.
The future prospects of well-diversified companies are not tied to the fortunes of one particular economy or dependent on the success of one particular product, making dividend growth more reliable. Johnson & Johnson, for example, sells health care products in virtually every country in the world ranging from plasters to medical devices and prescription medication.
Short-term share price volatility, caused by geopolitics and the like, is inevitable. However, in the long-term, investing in companies which: 1) fulfil a basic need; 2) have strong brands; 3) enjoy pricing power; 4) sell their product in growing markets; and, 5) are well diversified, are more likely to produce predictable dividend and capital growth.