In my experience, investors are far too preoccupied with picking ‘cheap’ companies, perhaps driven by Warren Buffett’s advice to be greedy when others are fearful. This bargain hunting often comes at the expense of owning quality companies, however.
If you truly want to get rich in the long term, I believe you should spend more energy searching for quality businesses than for low P/E ratios. With that in mind, here are two stocks I believe have the business models to keep the payouts coming.
A deluge of dividends
International beverage behemoth Diageo (LSE: DGE) has posted impressive dividend growth over the years. The payout has increased threefold since 1999. That’s a compounded annual growth rate of 9.65%.
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The company’s drinks, ranging from Captain Morgan’s to Guiness, are cash-cows that provide it with a fairly steady stream of income to expand its portfolio and develop acquired brands.
Diageo can build a brand with potential into a global powerhouse by employing its global structure (which includes huge marketing power and a vast distribution network) to increase the product’s reach and image.
In recent years, the company has disposed of non-core assets to focus on what it does best: selling spirits and beers. Removing distractions such as the small wine segment, which accounted for roughly 4% of revenues, is a step forward in my opinion.
That said, I’m not sure that now is the perfect time to buy Diageo. It offers only a 2.4% yield to prospective investors and the rate of dividend expansion is a little lower than the historical average at only 5% last year, although you only have to go back a few years to see the last double-digit hike.
I’d begin considering the shares for inclusion in a life-long portfolio if the yield topped 3%. That said, investors who bought the shares back in 1998 and still hold today are receiving a 10% annual return from the dividend alone, demonstrating the power of holding quality companies for the long term.
Quality I’d buy today
UBM (LSE: UBM) is one of the world’s largest trade show operators. Believe it or not, this seemingly boring operation provides the perfect economics for churning out big dividends.
Despite technologies like Skype making inter-business relations easier than ever, there is still no substitute for trade shows that bring together the top players in each industry. Of course, no one wants to jump from show to show because nothing would ever get done, but this aversion towards unnecessary shows actually plays right into UBM’s hands.
The company has carefully built a portfolio of must-see events that are attended by all industry leaders, allowing customers to only visit one or two key shows a year. Perhaps the strongest aspect of these shows is that customers book up months in advance, so UBM not only receives cash well in advance of serving its product, but can manage costs to remain profitable even when turnouts are low.
If you want to see this dynamic in action, check out results for fellow trade show operator ITE Group. It has remained remarkably resilient in recent years despite awful conditions in its primary markets.
UBM shares offer a 3.2% yield to investors today and management has vowed to hike the dividend at a faster rate to reflect the success of its ‘events first’ strategy.
