Marcel Stötzel of Fidelity European Trust (FEV ), explains why he and co-manager Sam Morse, look for companies that will consistently grow their dividends as history shows they are they best stock market performers. 

This is the first short video excerpt from our recent virtual event with Stötzel. If that’s whetted your appetite you can watch the entire one-hour ‘Big Broadcast’.

Can’t watch now? Read the transcript

Marcel Stötzel:

I would say this slide is probably the most important slide in the deck. This talks about what do we do?  If you look at the chart on the right, if you look at the five year, that blue bar over there, there are 38 companies that consistently, year after year, grew their dividend over the last five years in the MSCI Europe versus 281 that at some point over the last five years cut or held their dividends. We’ve sliced and diced this a million which ways across a number of markets. We recently ran this on the US market just out of interest and the conclusion is the same. Stocks that consistently grow their dividends outperform those that don’t. I’m sure there’s a bunch of people who are now shouting at the screen saying hold up, that’s data mining.

Obviously, when a company cuts their dividend the share price often falls quite materially and I fully agree. You couldn’t run this as a backward-looking strategy and those 38 stocks are not going to be the same over the next five years. The secret to making this work is if you can actually anticipate when the cut is going to come. We often sell after the cut. We don’t get it right all the time because we view the cut itself as a big red flag, but if we can even anticipate before the dividend cut happens, then we’re really doing well to play in that blue bar. So how do we do that is all of the facts that are listed on the left of the screen. So, things like positive fundamentals, proven business models, disciplined use of capital. Cash generative, strong balance sheets. It’s not illegal, obviously, to pay a dividend out of weak balance sheet, but chances are that three-to-five-year investment horizon is just not sustainable if you do so.

Then, if we’ve done that all right and we’re playing in that blue bar, there’s obviously only one way we can still get it wrong is if we overpay to begin with. That’s why that ‘and’ over there is meant to be a nice big bold blue ‘and’ to say that its dividend growth at a reasonable price. If I had to sum up our strategy in two words, it would be dividend growth, but people often hear the word ‘dividend’ immediately think it’s a dividend yield fund and that’s not at all the case. The word ‘growth’ and ‘dividend’ are equally important to us. We actually almost always have a dividend yield of lower than the market. So, what you’re getting is, you’re getting a fund that’s more expensive than the market, but for that price, you’re getting faster dividend growth than the market and if Sam and I are doing our job correctly and we’re playing that blue bar, you’re getting more sustainable dividend growth.