Dunedin Income Growth (DIG ) co-manager Ben Ritchie says five of the top FTSE 100 dividend stocks have cut payouts at least once in the past 15 years, which is why he and co-manager Rebecca Maclean make a big effort to find companies with genuinely sustainable earnings.

This is the second excerpt from our recent virtual event with the UK equity income investment trust.

You can watch the previous video: ‘UK is all about dividends, but beware high yielders’; or catch up with the whole one-hour ‘Big Broadcast’.

Can’t watch now? Read the transcript

Ben Ritchie:

What’s really important to us is our focus on sustainability and that’s a real differentiator for us. We put our mark in the sand around that. We think these things are important. This isn’t some sort of niche exercise. This is critical to understanding the real holistic sense of risks that companies face.

When you look at the top eight dividend payers in the FTSE 100, they might look very reassuring. We know all these companies. These logos. We see them on the high street, on the things we buy in the supermarket shelves.

Actually five of these eight companies have cut their dividends in the last 15 years. I think three of them have cut twice and one has even managed to cut its dividend three times. I think that should give you some indication as to how safe the underlying dividends of these companies are.

I think one of the things that we would also point out is that the drivers of earnings for the wider market are very cyclical: 40% of the dividends in the FTSE are coming from banks, which is effectively driven by the direction of interest rates; mining, which are driven by commodity prices and oil companies, driven by oil and gas prices.

Those things may go up. They may go down. I think the ability of people to be able to forecast the direction of bond yields, interest rates and commodities is relatively limited. Certainly, Rebecca and I would claim to have limited capabilities in that area and I would suggest that most people, probably, find that quite difficult.

Over the last two or three years it’s been a pretty good time to invest in those type of areas. Will that be the right thing to do over the longer-term? We’re just not sure. We prefer to invest in companies which we think have got access to more structural growth that can deliver better over the longer-term. That, for us, is really, really important.

It’s that focus on companies which we think really can deliver sustainable dividends and don’t just be seduced by those household names. Actually, they’re not as safe as you think they are. Underlying all of that is actually, the dividend growth. The top eight companies in DIGIT have delivered 7.6% dividend growth over the last five years, compared to just 4%. That’s quite a meaningful delta in terms of the delivery that’s come through there. It’s that combination both on resilience, but also, growth that we really, really need.