Olly seeks to achieve these aims through investing in growing companies with low capital requirements that pay out expanding dividends. He uses dividend growth as a proxy for earnings growth – Olly expects to see dividends rising over time as companies increase pay outs to shareholders while earnings grow. Since dividends are paid out in cash, companies with increasing pay outs will need to produce high quality cash earnings, with less scope for artificial inflation through financial manipulation or lower quality numbers.
He also expects the value of companies with strong and growing dividends to increase at least in line with inflation over the long term. Olly believes a company targeting shareholder pay outs should help improve management focus on capital discipline, which can help to sustain higher valuations and avoid value-destroying actions.
They are typically more stable, mature and secure companies, whose asset base and business has been built up over many years and is defended by an economic moat – an economic edge, competitive advantage or assets that are hard to replicate by new entrants, such as a strong brand, niche products or a dominant market position.