As share prices and dividends at oil producers and miners have been slashed over the past year, many investors will surely be learning the hard way that lower, but more reliable, dividends in non-extractive sectors can be better for your portfolio in the long run. As the following table shows, Schroders (LSE: SDR), Prudential (LSE: PRU) and Shire (LSE: SHP), all provide safely covered dividends, have a history of progressive payouts and significant room to grow dividends in the coming years.
| Dividend Growth 2010-2015 | Earnings % Paid As Dividend | Dividend Growth 2015-2017 | |
| SDR | 129% | 49% | 18% (Forecast) |
| PRU | 67% | 36% | 22% (Forecast) |
| SHP | 101% | 19% | 25% (Forecast) |
Asset manager Schroders is in a very strong position to continue increasing shareholder returns as it has weathered the current financial upheaval better than competitors. While share prices are off 17% over the past year, the company has continued to post strong results. For the first three quarters of 2015, revenue was up 7%, adjusted pre-tax profits rose 12% and the company saw net inflows increase 16% despite turbulent markets.
Schroders’ advantage over other asset managers is its high level of geographic and customer diversification. A mix of institutional, retail and high net worth clients have allowed it to avoid huge drawdowns from sovereign wealth funds at emerging market-heavy competitors such as Aberdeen Asset Management. This strong base is why analysts are pencilling-in earnings growth of 13% for the next two years. This growth potential and twice-covered 3.4% yielding dividend make me believe Schroders could well double dividends again over the next five years.
It’s all about China
China’s slowdown has knocked shares of Asia-focused insurer Prudential down 24% over the past year. Despite the dramatic headlines coming out of the world’s second largest economy, Prudential still increased revenue in Asia by 31% in the first three months of 2015. And despite slowing growth in China, the country’s middle class is still growing by the millions annually. These are the prime targets of Prudential’s insurance and asset management offerings, and will be a huge growth market in the coming decades.
Analysts are expecting this scenario to play out and see earnings increasing 18% over the next two years alone. This growth and high cover will allow dividends to continue rising steadily from their current 3.2% yield for the foreseeable future.
Dividend growth ahead?
Pharmaceutical giant Shire’s negligible 0.4% dividend yield may not initially catch the eye of income investors, but it could hold the long-term potential to increase dramatically. Shire’s management has been in the midst of a huge shopping spree, with more than $50bn spent on acquisitions in the past three years. The company announced last month that after its $32bn deal for Baxalta, it would keep its chequebook in the drawer for at least the next two years. As the $25bn of debt from these deals is paid down in the coming years, more cash will be freed up that could be returned to shareholders through dividends or buybacks. 2015 net profits of $1.3bn from revenue of $6.4bn suggests that if management reaches its target of $20bn of revenue by 2020, dividends could increase significantly.
