Troy UK Equity Income – Protect & Grow No.9


Prioritising sustainable dividend growth over high yield

A key pillar to the quality approach to equity income we follow at Troy is an emphasis on sustainable dividend growth, rather than high yield. The case for such an approach is powerfully illustrated by the chart below. It demonstrates that the higher the yield, the lower the subsequent dividend growth and vice versa. Notably, the chart also implies that on average, dividend yields between 4-5% do not grow, and, worse still, that companies with dividend yields above 5% tend to cut their dividends the following year.

Figure 1 – Dividend Yield vs Growth the following year (FTSE All-Share constituents) 

Past performance is not a guide to future performance and income generated (if any) may fall as well as rise.

Source: Factset, 31 December 2009 to 31 December 2022. Based on the historical constituents of the FTSE All Share Index ex Investment Trusts, groups aggregated using the mean. Outliers removed (+/-2 standard deviations) Income generated (if any) may fall as well as rise. All references to benchmarks are for comparative purposes only.

UK investors have suffered several high-profile dividend cuts in recent times where optically high dividend yields have ultimately proven unsustainable; banking stocks in the Global Financial Crisis, oil majors heading into the pandemic and most recently housebuilding stocks in a higher interest rate environment. A dividend cut is not only painful for the income account, it is almost always accompanied by weak share price performance. I have always believed that dividend growth, as a reflection of underlying free cash flow growth, is the ultimate long-term driver of equity returns, and am therefore very wary of reaching for high yield.

Income investors should also be wary of the far-left hand side of this chart at times when low dividend yields are reflective of high valuations. Dividend growth of 20% is appealing, but stocks with such low yields can come with material valuation risk and high share price volatility.

We seek sustainable dividend growth from quality, resilient companies trading at reasonable valuations. We like companies that pay out a sensible proportion of their profits as dividends, retaining a healthy portion to reinvest in further growth. Generally, we have found the right balance tends to be in and around the 2-4% dividend yield bands. If companies in this range are paying out roughly half of their earnings as dividends, it means that on average their shares will trade on 4-8% earnings yields1 . These are valuations that I deem attractive for resilient, growing companies. The portfolio today has a forward dividend2 yield of c.3.2% and an earnings yield of c.6.0%. If the chart is anything to go by, investors can reasonably expect mid-single digit dividend growth from the Fund over time, equating to a doubling of income every 10 to 15 years or so. This also concurs with our bottom-up forecasts for individual stocks. Importantly, we also aim to provide a stable income stream that does not suffer the same volatility across economic cycles as that seen historically in the wider market.

Dividend growth opportunities

As discussed in previous newsletters, we believe the UK market in particular offers compelling value today. There is an increasingly rich opportunity set emerging for UK dividend growth investors. Many high-quality companies in our internal investment universe currently sit within our favoured 2-4% dividend yield band. Below I pick out three held in the Fund today.

Earnings yield5.3%6.5%6.0%
Dividend yield2.4%2.8%4.0%
Latest dividend growth10%5%2%
Payout Ratio45%45%66%

Past performance is not a guide to future performance and income generated (if any) may fall as well as rise.

Source: Bloomberg, 30 September 2023. The latest dividend growth refers to the most recent dividend declared by each company. The payout ratio is the proportion of earnings paid out as dividends to shareholders.

At the lower end of this 2-4% range is Intercontinental Hotels Group (IHG), owner of leading hotel brands including Holiday Inn, Crown Plaza and The Intercontinental. Whilst 6,000 physical hotels sit within their system, only six of these properties are owned by IHG, with the majority operating under franchise agreements. The beauty of this franchise approach is that IHG enjoys a largely capital-free growth model. Third-party operators take on the risk and cost of opening hotels, paying IHG a royalty for the use of one of their brands. This has enabled IHG to grow in a highly efficient way and to generate prodigious cash flow as their hotel network expands globally. The industry is currently enjoying good demand from both leisure and corporate customers. Strong profit growth for IHG is translating to good dividend growth for shareholders – IHG’s most recent dividend pay-out grew 10%. The current dividend yield is c.2.4% and the earnings yield is c.5.3% both of which are lower than the portfolio average, but this is reflective of the growth potential on offer. Less than half of IHG’s profits are paid out as dividends, leaving an ample portion to reinvest in this growth opportunity.

An example of a company in the middle of the 2-4% dividend yield range is industrial conglomerate Smiths Group, a new holding for the Fund in 2023. Smiths is a high-quality engineering business with an over 100-year history on the London Stock Exchange. Today it is a multinational, diversified company, with world-leading positions in several

end market niches ranging from oil & gas to construction and aerospace. Given the breadth of the business and the fact that c.70% of profits are earned from relatively predictable service and aftermarket sales, Smiths is less exposed to the economic cycle than many typical industrial companies. Smiths recently reported a healthy 5% dividend growth rate for their 2022/23 financial year and guided to similar growth going forward. Smiths has a c.2.8% dividend yield and c.6.5% earnings yield, which is attractive to us, especially given the high return on capital historically earned by the business, the strong balance sheet and the potential for mid-single digit growth into the medium term.

At the top end of this 2-4% range, where growth is likely to be slower, but dividend yields are higher, investors can find certain consumer staples companies including food and personal care giant Unilever. The company own some of the most recognisable brands in the world including Dove, Hellmann’s and Ben & Jerry’s. Unilever is a truly global business and over time has had the ability to expand even further into emerging markets and into adjacent product categories. With a new CEO and sensible refreshed strategy, we expect dividend growth to re-accelerate from the most recent c.2.0% level towards the mid-single digit range. The current dividend yield is c.4.0% and the earnings yield c.6.0%, both highly reasonable for such a high-quality, resilient business.

IHG, Smiths and Unilever are three examples of large, high-quality, cash generative companies within the portfolio that have a good balance between dividend yield and growth. Pleasingly for us as stock-pickers, we are finding multiple other such opportunities across the UK market today.

Bonds are an alternative once more, but it’s equities for the long run

We believe that an emphasis on dividend growth, rather than high yield, is particularly important at this current point in time. Such was the lack of yield available from government bonds in the years post the global financial crisis, that investors were consistently sold the ‘TINA’ adage – “there is no alternative” to equities. But higher inflation has meant that investors can once again get a risk-free yield from government bonds of c.5%. Some investors are understandably rebalancing their asset allocations between bonds and equities as a result.

Crucially however, what equities can offer over fixed income is a perpetually growing yield on original investment. Bonds on the other hand provide a fixed yield for the term of the bond, and potential reinvestment risk at maturity. Growth of earnings and dividends will always be the big advantage of equities over bonds and is the investor’s primary defence against the corrosive effects of inflation. As the chart above shows us, key to enjoying the benefits of dividend growth is finding the right balance between yield and growth. This means in most cases avoiding the highest yielding areas of the market. With inflation still high, and with yield available from fixed income, it is our belief that investors should prioritise dividend growth, not high yield, from their UK equity allocations.

1Earnings yield is the inverse of the Price to Earnings ratio, therefore is defined as Earnings per share/Share price. Please see Troy’s Glossary of Terms.

2Forward dividend yield refers to the projection of a company’s yearly dividend.

Please refer to Troy’s Glossary of Investment terms here. Fund performance data provided is calculated net of fees with income reinvested unless stated otherwise. All performance and income data is in relation to the stated share class, performance of other share classes may differ. Past performance is not a guide to future performance. Overseas investments may be affected by movements in currency exchange rates. The value of an investment and any income from it may fall as well as rise and investors may get back less than they invested. The historic yield reflects distributions declared over the past twelve months as a percentage of the fund’s price, as at the date shown. It does not include any preliminary charge and investors may be subject to tax on their distributions. Any reference to benchmarks are for comparative purposes only. Tax legislation and the levels of relief from taxation can change at any time. Any change in the tax status of a Fund or in tax legislation could affect the value of the investments held by the Fund or its ability to provide returns to its investors. The tax treatment of an investment, and any dividends received, will depend on the individual circumstances of the investor and may be subject to change in the future. The yield is not guaranteed and will fluctuate. Any objective will be treated as a target only and should not be considered as an assurance or guarantee of performance of the Fund or any part of it. The fund may use currency forward derivatives for the purpose of efficient portfolio management.   
Neither the views nor the information contained within this document constitute investment advice or an offer to invest or to provide discretionary investment management services and should not be used as the basis of any investment decision. Any decision to invest should be based on information contained in the prospectus, the relevant key investor information document and the latest report and accounts. The investment policy and process of the fund(s) may not be suitable for all investors. If you are in any doubt about whether the fund(s) is/are suitable for you, please contact a professional adviser. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. Although Troy Asset Management Limited considers the information included in this document to be reliable, no warranty is given as to its accuracy or completeness. The opinions expressed are expressed at the date of this document and, whilst the opinions stated are honestly held, they are not guarantees and should not be relied upon and may be subject to change without notice. Third party data is provided without warranty or liability and may belong to a third party. 
The Fund is registered for distribution to the public in the UK but not in any other jurisdiction. The sub-funds are registered for distribution to professional investors only in Ireland.  
The distribution of certain share classes of the sub-funds of Trojan Investment Funds (“Shares”) in Switzerland is made exclusively to, and directed at, qualified investors (“Qualified Investors”), as defined in the Swiss Collective Investment Schemes Act of 23 June 2006, as amended, and its implementing ordinance. Qualified Investors can obtain the prospectus, the key investor information documents or, as the case may be, the key information documents for Switzerland, the instrument of incorporation, the latest annual and semi-annual report, and further information free of charge from the representative in Switzerland: Carnegie Fund Services S.A., 11, rue du Général-Dufour, CH-1204 Geneva, Switzerland, web: The Swiss paying agent is: Banque Cantonale de Genève, 17, quai de l’Ile, CH-1204 Geneva, Switzerland. 
Certain sub-funds are registered in Singapore and the offer or invitation to subscribe for or purchase Shares in Singapore is an exempt offer made only: (i) to “”institutional investors”” (as defined in the Securities and Futures Act, pursuant to Section 304 of the Securities and Futures Act, Chapter 289 of Singapore, as amended or modified (the “”SFA””); (ii) to “”relevant persons”” (as defined in Section 305(5) of the SFA) pursuant to Section 305(1) of the SFA, and where applicable, the conditions specified in Regulation 3 of the Securities and Futures (Classes of Investors) Regulations 2018; (iii) to persons who meet the requirements of an offer made pursuant to Section 305(2) of the SFA; or (iv) pursuant to, and in accordance with the conditions of, any other applicable exemption provisions of the SFA. “ 
All references to FTSE indices or data used in this presentation is © FTSE International Limited (“FTSE”) 2023. ‘FTSE ®’ is a trade mark of the London Stock Exchange Group companies and is used by FTSE under licence. Issued by Troy Asset Management Limited, 33 Davies Street, London W1K 4BP (registered in England & Wales No. 3930846). Registered office: 33 Davies Street, London W1K 4BP. Authorised and regulated by the Financial Conduct Authority (FRN: 195764) and registered with the U.S. Securities and Exchange Commission (“SEC”) as an Investment Adviser (CRD: 319174). Registration with the SEC does not imply a certain level of skill or training. Any fund described in this document is neither available nor offered in the USA or to U.S. Persons.  

© Troy Asset Management Limited 2023.

Website Terms and Conditions

Welcome to the website of Troy Asset Management Limited (“Troy”, “we”, “our”, “us”).  Please read these terms and conditions carefully.  By accessing this website you are indicating that you have read, acknowledge and agree to be bound by the following terms and conditions and that you have read Troy’s Privacy Notice (which can be accessed here).  If you do not agree to these terms, you must stop using this website immediately.

This website uses cookies and similar technologies.  Information about our use of cookies is included in our Privacy Notice accessed here.  You can edit your cookie settings on this website.

Troy Asset Management Limited is authorised and regulated by the Financial Conduct Authority (“FCA”) of the United Kingdom which can be contacted at 12 Endeavour Square, London E20 1JN.  Troy is registered on the FCA’s register with firm reference number 195764.  Troy is registered with the U.S. Securities and Exchange Commission (“SEC”) as an Investment Adviser (CRD: 319174).  Registration with the SEC does not imply a certain level of skill or training.  Troy is the owner and operator of this website and can be contacted using the details set out in section 11 below.

This website describes Troy’s capabilities and is for information purposes only.  Nothing in this website should be construed as investment, tax, legal, accounting or other advice.

The securities described on this website are not intended for use and are not offered in the United States of America or to U.S. Persons.  Please see section 2 for further detail.

  1. Who may access this website – subject to local restrictions

The information on this website is directed at persons in the United Kingdom (“UK”) and not otherwise. The availability of any funds managed by Troy or services provided by Troy mentioned on this website in any jurisdiction other than the UK is subject to local restrictions.  Except as specifically set out below the funds mentioned on this website have not been registered or approved for distribution under the laws of any jurisdiction other than the UK.

If you are accessing this website from a jurisdiction other than the UK, you are required to inform yourself of and observe any applicable local restrictions.  If you choose to access the website and you do so from a country other than the UK, you do so at your own risk and Troy will not be liable for any breach of local law or regulation that you commit as a result of doing so. The information available on this website does not constitute an offer of, or an invitation to apply for or purchase, any securities.

Trojan Investment Funds and its sub-funds are UK funds established under the provisions of the European Directives on the co-ordination of laws, regulations, and administrative provisions relating to undertakings for collective investment in transferable securities (“UCITS”) (Directive 2009/65/EC) as implemented in the UK.  Trojan Investment Funds is authorised by the FCA.  Certain sub-funds are available for distribution in Ireland (for professional investors only), Singapore (for institutional investors only), Switzerland (for qualified investors only) and are registered for distribution to the public in the UK.

Trojan Fund (Ireland), Trojan Income Fund (Ireland), Trojan Global Income Fund (Ireland) and Trojan Ethical Fund (Ireland) are sub-funds of Trojan Funds (Ireland) plc which is an Irish UCITS subject to the laws of the Republic of Ireland.  Each is authorised in the Republic of Ireland by the Central Bank of Ireland, and is a scheme recognised by the FCA under the Financial Services and Markets 2000 Act (“FSMA”).  Trojan Fund (Ireland) and Trojan Income Fund (Ireland) are registered for distribution in Austria (certain share classes only), Germany (certain share classes only), Ireland, Italy (for institutional investors only), Singapore (for institutional investors only), Spain (certain share classes only), Switzerland and the UK.  Trojan Fund (Ireland) is also registered in Portugal (certain share classes only). Trojan Ethical Fund (Ireland) is registered for distribution in Ireland, Singapore (for institutional investors only), Spain (certain share classes only), Switzerland and the UK.  Trojan Global Income Fund (Ireland) is registered for distribution in Ireland, Spain (certain share classes only), Switzerland and the UK.

  1. Important information for U.S. Persons

This website as well as the securities described on this website are not intended for use and are not offered in the United States of America (including the District of Columbia or any other territory occupied or possessed by the United States of America) or to U.S. Persons (including residents of the United States of America, residents within an area subject to its jurisdiction and U.S. Persons who are resident outside the United States of America).  As such, by accepting these terms you represent and warrant that you are not a U.S. Person as defined under Regulation S of the United States Securities Act of 1933, as amended.

U.S. Persons interested in services provided by Troy should instead contact us directly on [email protected] or call +44 (0)20 7499 4030.

  1. Suitability of products and services

The products and services described on this website may not be suitable for all investors.  Troy does not provide investment advice or make personal recommendations to investors.  If you wish to obtain advice about the suitability, or have any doubt about the suitability, for you of products managed by Troy or services provided by Troy, you should contact a financial adviser.

Should you have any general queries or require support relating to Troy or its products and services, please do email [email protected] or call +44 (0)20 7499 4030.

  1. Risk warnings

The value of investments and the income from them may go down as well as up and investors may get back less than they invested.  Changes in rates of exchange may cause the value of investments to go up or down.  Past performance is not a guide to future performance.

Tax legislation and the levels of relief from taxation can change at any time.  Troy does not provide tax, legal or accounting advice and therefore the information presented on this website should not be relied upon.  Please consult your own financial advisor before engaging in any transaction.

The information on this website is for information purposes only and does not constitute a recommendation, solicitation, offer or invitation to purchase or sell any investment product, perform any other transactions, or conclude any other legal transactions.

Changes to website content

These terms and conditions and the information contained on this website is subject to change without notice and no guarantee is made as to its accuracy, completeness or fitness for a particular purpose. Troy has expressed its own views and opinions on this website and these may change without notice.  Troy is under no obligation to update information and visitors to this website should not rely solely on the information contained on this website in making an investment decision.

We keep our terms and conditions under review.  These terms and conditions were most recently updated on 8 September 2023.

  1. Intellectual property rights

Troy is the owner or licensee of all intellectual property rights (including copyright and database rights) that subsist in this website, and in the material published on it.  No right is granted to use the website:

(i) to create a database (electronic or otherwise) that includes material downloaded or otherwise obtained from the website except where expressly permitted on this website or by written agreement with Troy;

(ii) to transmit or re-circulate any material obtained from the website to any third party except where expressly permitted on this website or by written agreement with Troy;

(iii) in such a way so as to remove the copyright or trademark notice(s) from any copies of any material made in accordance with these terms.

No use of Troy’s name, logos and/or other trademarks (whether registered or unregistered) may be made by you without separate express written agreement being given by Troy (or its licensors).

  1. Liability

Whilst Troy has sought to ensure the accuracy and completeness of the information contained on this website as at the date of publication, save as required by applicable law and regulation, Troy gives no warranty or representation and accepts no liability in respect of the accuracy, adequacy or completeness of such information.

Whilst Troy endeavours to maintain the availability of this website Troy cannot guarantee that your use of this website will be free from error and/or uninterrupted.  Accordingly, the website is provided on an “AS IS” and “AS AVAILABLE” basis without any warranties of any kind.  We do not accept any liability arising from any interruption in availability.

Whilst effort has been taken to ensure that the website is free from viruses, no warranties are given that it is free from viruses and users are responsible for ensuring that they have installed adequate anti-virus software.  Troy shall not be liable for any viruses or any other computer code, files or programmes designed to interrupt, restrict, destroy, limit the functionality of or compromise the integrity of the website or any hardware on which it is hosted.

  1. Third party websites

This website may contain links to external websites operated by third parties.  These links are included to give users the opportunity to access other pages that it is felt may be of assistance to them.  Troy makes no representations as to the accuracy or any other aspect of the information contained on such websites and Troy accepts no responsibility for the content of such websites.

  1. Data protection

On some pages of this website, users are asked to contact Troy to provide, or obtain, further information.  Please refer to our Privacy Notice (which can be accessed here) which provides information about how we gather and use personal information.

  1. General

Each of the paragraphs of these terms and conditions operates separately.  If any court or relevant authority decides that any of them are unlawful or unenforceable, the remaining paragraphs will remain in full force and effect.

If we fail to insist that you perform any of your obligations under these terms and conditions, or if we do not enforce our rights against you, or if we delay in doing so, that will not mean that we have waived our rights against you and will not mean that you do not have to comply with those obligations.

These terms and conditions are governed by English law and are available only in English.  You and we both agree that the courts of England and Wales will have non-exclusive jurisdiction over any dispute or claim arising under these terms and conditions.

  1. Contact details

Troy Asset Management Limited, 33 Davies Street, London W1K 4BP, United Kingdom; Telephone +44 (0)20 7499 4030; Email [email protected].  Troy Asset Management Limited is a limited company registered in England and Wales under company number 3930846 and has its registered office at 33 Davies Street, London W1K 4BP , United Kingdom. Except where otherwise required by applicable law or regulations, all communication and documentation sent to you by Troy will be in English.  You may communicate with us in English.

For more information about this website, including information concerning the personal data Troy holds about you, please contact us by email via [email protected].

© Troy Asset Management Limited 2024. All rights reserved.



I accept these Website Terms and Conditions