Dividends are a key component to long term total returns. From 1940 to 2010 90% of the total return of the S&P 500 was from dividends. One of the benefits of dividends is that they have the ability to grow over time which can help offset the effects of inflation and low or rising interest rate environment. And who doesn’t appreciate a growing income stream?
Because we’re explicitly aiming for dividend growth, we focus on high quality companies. The idea of investing in high quality companies sounds nice (who doesn’t want high quality companies in their portfolio?), but it isn’t just a vague concept or slogan. We have developed an investment methodology that rigorously, even ruthlessly, identifies high quality companies. To us, high quality means companies that have demonstrated a long-term consistent ability to generate high levels of cash flow. It is this demonstrated ability to generate relatively high levels of cash that allows companies to grow their dividend over time. And, as we’ve said, the only thing we like better than dividends are growing dividends.