- 29 of the best UK shares for income investors
- Valuation assessment versus history and interest rates
Our Secret Buy-sider has selected a watchlist of UK dividend shares based on output and ideas from the Alpha dividend yield screen. They aren't just going for yield but a selection of companies with the ability to steadily maintain and grow pay-outs over the long run. - JN
The Secret Buy-sider:
The income investor is someone who should be trying to identify companies that can maintain or grow their dividend through the economic cycle. They should focus their attention on finding businesses with some GDP type linked growth, pricing power and a generous capital return profile.
Paying a dividend promotes a strong capital allocation framework within a business. If a management team commits to a growing pay-out each year it sharpens minds and focusses capital allocation on increasing the cash flow in order to meet this demand. Only those capital projects with the highest returns will get internal sign-off and management are incentivized to spend their time searching for ever higher returning projects. This dynamic facilitates businesses becoming higher returning as 1. Only the highest returning projects are commissioned by management; and 2. Surplus cash is returned which the investor can either spend or invest to receive additional returns.
From the Alpha UK dividend screens we have selected a watchlist of 29 companies. This is to be viewed as a refined UK dividend universe not necessarily stock picks.
When following the rules of the screen there is a natural exposure to most sectors, this is in part because corporate philosophy in the UK is one that dividends are an important element for any prospective investor. It is, however, worth noting that sectors which generate surplus cash will be overrepresented versus the index - namely financials and consumer staples.
It should not be a surprise that this watchlist has a natural tilt towards UK large caps; once a company reaches a certain size it is harder to reinvest all capital generated back into business growth and surplus cash can be returned as dividends.
Dividend investing can suit an investor that wishes to exploit the capital allocation handcuffs dividends impose and reinvest the proceeds to compound the returns further, so it's a great long-term strategy.
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