Dividend growth investing may be one of the market’s oldest ideas, but DivGro’s chief investment officer is betting that it remains one of its most underutilised.
DivGro is a boutique asset manager, founded in 2019, which harnesses the power of rising dividends to create a growing income stream and high capital growth.
Built on the Gordon Growth Model developed more than six decades ago, the strategy focuses not on high income today, but on identifying global companies capable of growing dividends rapidly and sustainably for decades – on the premise that where dividends go, share prices ultimately follow.
Chief investment officer Jonathan Nurick says that by combining quantitative discipline with an explicit focus on investor behaviour, DivGro aims to turn a proven academic model into a long-term compounding engine investors can actually stick with.
“The Gordon growth model has been around now for more than 60 years, having been uncovered or developed in the late 50s and early 60s by what became a renowned team – but it’s significantly underexploited,” he told InvestorDaily.
“What we noticed when we were exploiting it in our family office context, before developing the fund for outside investors to come along with us, is that if you’re able to exploit it from a quantitative standpoint, you can score very well. Where the dividend goes, the share price follows. The faster the dividend growth, the faster the share price growth will be, as long as that’s sustained.”
Nurick said his team identified a behavioural element largely ignored by both academic research and market practitioners.
“The sharemarket is a very difficult place, emotionally and psychologically, for all participants, professionals, and non-professionals alike. Part of that is by design, to create activity you need to change people’s expectations and feelings and sentiment. But everybody understands a dividend. It’s paid in cash. It’s received in cash, watching it grow and watching it grow fast, has a real stabilising or anchoring feeling.”
According to Nurick, prioritising rapid and sustainable dividend growth over high initial yields is a distinction many investors misunderstand.
“We thought you could put those two insights together … If you execute a well and a proven model, your outcome will be strong, but you increase the chance for the investor of actually getting that outcome, and not having this temperamental behavioural gap that most investors suffer relative to their holdings,” he said.
“In Australia, most people, they hear dividends, they think, ‘how much am I getting today?’ And that’s the natural response, but in many respects, it misses the exponential aspect of compounding by demanding that a company gives you as much as it possibly can today, it means that litter is being reinvested.”
DivGro’s approach instead asks: where is the income that wasn’t paid out, and how productively is it being used?
Nurick said that when companies distribute nearly everything they earn, there is little left to expand, improve or develop the business.
“Fast forward that or apply that for a bunch of years, and there wouldn’t be an expectation that the dividend would grow much, because you’re not spending on improving, not research and development, not more people, not new locations,” he said.
“Let’s flip that over. Instead of demanding the maximum now, let’s rather ask for a more modest amount of the current income that the company is earning. Let’s encourage most of it to go back into the business, to develop it, assuming they can reinvest very productively at high rates.”
Nurick said this allows the engine of dividend production to grow and expand rapidly, with dividends rising alongside it.
“If there isn’t dividend growth, in a dividend paying company, you shouldn’t expect the share price to grow either.”
“If somebody comes to depend on that income, that’s very dangerous. Rather, if you look for a company that is developing its dividend rapidly, you can enjoy that base of income, and with a much higher degree of confidence, there’ll be more next year, much more the year after, much more the year after that. and the capital green tandem,” he said.
Nurick believes many of the best dividend growth opportunities sit offshore.
“In Australia, a lot of the dividend payers pay out the overwhelming majority of what they earn. They’re not really reinvesting and therefore they’re not really growing. There’s a handful of companies that don’t behave that way, they would be outliers. Whereas in the US, partly because of who the investor base is, partly because of differences in taxation, partly in terms of the concept of capital markets and entrepreneurialism… Companies generally reinvest more and pay out less,” he said.
He added that DivGro favours businesses that are deliberately unexciting.
Nurick pointed to US-based Cintas, a major provider of uniforms and work apparel, as a prime example.
“[Cintas] has been going since the 30s. Cintas today is enormous. It has 1.2 million business customers. Even though customers don’t necessarily have decades long contracts, they end up continuing with Cintas for decades on end, usually indefinitely. And for us as business owners and investors, we can look at that and say, this is an incredibly predictable business.”
Nurick said Cintas has grown its dividend for more than 40 consecutive years, averaging 19 per cent annually.
“The part that isn’t paid to us is reinvested very predictably: another industrial laundry, another series of vans, another sales force to drive those vans, to arrive, often at more locations of their existing customers.
“While this might not captivate the attention like the latest whiz bang AI application, or something that people might deem exhilarating, what it does is this works like clockwork.”
According to Nurick, Australian investors may hesitate to allocate to global dividend growers simply because they are less familiar.
“Australian investors have been so attuned to this idea of ‘I want my income now’, because large participants on the ASX provide that income now, though it doesn’t really grow as a category. What one needs to look for for this type of application? Things that aren’t sensitive to these kinds of macro things beyond.”
He said DivGro avoids industries that are highly cyclical or exposed to uncontrollable macro forces.
“Banks relating to interest rates, resources in terms of the price of the thing coming out of the ground. We don’t like shipping or airlines because they’re very sensitive to weather, which is inherently unpredictable,” he told InvestorDaily.
“What we do like are things that are very predictable, that represent a very small cost for something recurring for either a business or a consumer.”
He added that while currency risk may concern Australian investors, “it’s relatively easy to hedge it.”
