Investing in dividend shares in the UK is one of my favorite passive income ideas. But while I prefer shares that pay dividends, I especially like those that increase their payouts every year. Scientific instrument maker The judge is a scientist (LSE: JDG) is a company that has doubled its dividend in recent years.
Here’s why I would still consider Judges Scientist as the stock to buy for my portfolio, even at current share prices.
Warren Buffett style capital allocation
Investor Warren Buffett has previously said that his biggest skill is capital allocation. Why is it so important?
Suppose an investor has 1,000. If he allocates it to a 2% repaying bond, one year later he will have £ 1,020. But if he allocates it a fraction of 8% – e.g. British American tobacco – After one year it will be £ 1,080. Over time, due to compound interest, the difference will become more pronounced. But a stock usually carries more risk than high-quality government bonds, so it’s possible that the shares will lose value (as happened when Buffett invested a few years ago). Tesco). Thus, allocating capital because it makes the difference between high returns, low returns and negative returns.
Like Buffett, the judges focused a lot of attention on capital allocations. Like Buffett, it has a disciplined approach to the criteria for doing business. It does not focus on getting the right value for the business and paying extra for it. By not paying extra at the time of acquisition, judges can make such purchases much more profitable than they are.
Shares need to be bought now for the possibility of increasing dividends
In the case of dividends, the judges deviated from Buffett’s philosophy. Not only does it pay a dividend, it has a great record of paying every year. This past year, for example, the company has increased dividends by 10%. This is actually lower than the company’s standard: over the next two years it increased its dividends by 25% annually.
How can a company achieve this type of marketing dividend increase? In my opinion, this is where the smart capital allocation policy comes in. By buying high quality companies at attractive prices, it is able to generate a substantial amount of cash flow. Its focus on scientific instruments means that its customers are willing to pay for base quality, because accuracy is important. So the judges have the pricing power, which enables it to increase profits. Earnings per share came in at 3 1.31 last year. The dividend of 55p was so well covered and I consider the judges as shares to buy now for my portfolio.
Can the judges increase his dividend?
From that coverage it is clear that the judges have the opportunity to increase the dividend to double digits if they prefer. But the popularity of the stock means that the dividend yield is currently only 0.7%. So with the rise of double digits, yields may fall behind the FTSE 100 average.
Added to this is the risk of shares. In a price-to-earnings ratio of 43, they clearly have high investor expectations. Risks include the negative sales impact of judges not being able to travel to have staff install some equipment and the risk of lab closures delaying equipment replacement for some customers. Both can hurt judges’ revenue and profits.
Christopher Rouen owns shares in British American Tobacco. Motley Flower UK is recommended by British American Tobacco, Judges Scientific and Tesco. The opinions expressed in the companies mentioned in this article may differ from those of the authors and therefore the official recommendations we make on our subscription services such as Share Advisors, Hidden Winners and Pro. Here at The Motley Flower we believe that considering a variety of insights makes us a better investor.