Dividend investing remains a popular strategy, but what makes a great dividend stock? Nick Clay, manager of the TM Redwheel Global Equity Income fund, explains to the FundCalibre team the key characteristics of strong dividend-paying companies, the sectors offering the best opportunities, and the macroeconomic factors influencing global equity income investing. They also discuss the role of dividends in different market cycles and what investors should consider when building a diversified portfolio.
Why you should listen to the interview: This episode is packed with expert insights on how dividend investing can enhance portfolio returns while managing risk. You’ll learn how to identify high-quality dividend stocks, navigate market volatility, and build a resilient income-focused strategy.
This interview was recorded on 2 April 2025. Please note, answers are edited and condensed for clarity. To gain a fuller understanding and clearer context, please listen to the full interview.
Interview highlights:
US exceptionalism will be the end of capitalism
“There’s been good reasons why the US has outperformed the rest of the world over the past few years. And that is predominantly to do with far better margins and the increase in margins of the companies in the US and the earnings growth that’s come with that. And some of the margins that some of the companies are making, particularly in the most popular investments, the Magnificent Seven and the like of, you know, for example, Nvidia generating about an 80% gross margin. If American exceptionalism is going to continue, you are effectively saying that those margin improvements, that earnings growth differential between America and the rest of the world will continue pretty much for the foreseeable future. And it were you to say that you are effectively saying that mean reversion is going to fail that mean reversion has stopped working.
“And why that’s such an important assumption to have to make is that at the heart of capitalism is mean reversion. The whole point of capitalism is it attracts capital to where returns are high and therefore that increased competition brings those margins and returns down over time. And it starves capital where where margins are terribly low and you get rid of unproductive capital and move it on. And that’s how we evolve and that’s how capitalism works.
“But if mean reversion were to fail, i.e. America can just continually persist and ever higher margins than anyone else at growth levels that are higher than anyone else, well then you are effectively saying capitalism is broken.
“What’s interesting about that assumption though is what you are really creating is state sponsored monopolies or some kind of regulatory environment around them in order to protect those returns over time. And what’s interesting about other countries and economic models where that is the case is when you look at the performance of those those economies is they don’t tend to be innovative. They don’t tend to sustain great margins over long times because they become lazy. The competition normally keeps you hungry, you remove competition, companies become lazy, they don’t innovate, and eventually the growth diminishes. That’s why capitalism is a model that a lot of the democratic western economies want to follow.
“And so if mean reversion really still holds true and capitalism is still very much our economic model, then the assumption that American companies are going to continue to persist with record high margins, that Nvidia is going to continue to sell all its GPUs at 80% gross margin seems highly unlikely. And therefore, if that’s the case, the fact there we’re at these extreme concentration in the US at the, mean reversion would tend to tell you that that doesn’t go on forever. That will start to revert and therefore you want to be facing somewhere else in your portfolio.”
Seeking opportunities in luxury
“This year will be the 20 year anniversary of the philosophy of this strategy. And over that period, this is the first time ever we’ve been allowed to buy LVMH, the first time ever. It’s become cheap enough and obviously it became cheap enough because of the woes hanging over the luxury sector particularly resound surrounding the Chinese consumer where everybody believed that the Chinese were never gonna buy a handbag again. And of course that’s what made it difficult wanting to buy luxury at the time because everyone was telling us were fools for doing so. But actually what has come through so far this year is that maybe it isn’t all doom and gloom.
“And again, sort of harking back to one of the answers to the earlier questions about mean reversion is that it would assume that the Chinese government do absolutely nothing to try to save their economy. And also to try to get their consumer to spend again having been basically in a savings mode since the pandemic – the Chinese consumers are not in financial ruin.
“And when you step back and look at the luxury industry as a whole, and you look back over its history, we see that as an industry it tends to benefit well in difficult times simply because of the nature of the cohort of the population they’re selling to. They tend to be the wealthier part of the population, therefore in a better able to suffer economic volatility and turmoil. And also that it continues to be the case that the growth in the wealth of the middle classes leads to an aspirational desire of human beings to want to demonstrate that success by buying luxury. And we see very little evidence around the world to suggest that that’s come to an end.
“We think that the industry is fairly healthy now. There’s definitely going to be problems and short term volatility in their sales and that gives you the opportunity to get into these companies. But when they get to valuations which are telling you that they’re probably never going to sell their goods ever again, well that’s the time you want to be buying them. We think that that’s very much the case across most of luxury, LVMH included, and that’s why we were able to buy it and very happy to be doing so.”
The three attributes investors need to look for
“One is that companies are nominal too, so they can grow their dividends. And that helps you suffer in a real sense keep up with the inflation. Now that obviously means you need to invest in companies that can increase their prices and you need those characteristics.
“The second characteristic is that in a volatile environment, when your series of returns are volatile, you need to keep your volatility lower than that at the market. Mathematically your downside numbers matter more than your upside numbers. And that is a big sea change from how everybody has thought in the last few years, which has all been about markets just go up and up and up and we just need to keep up with markets, i.e. upside capture’s most important. Now your downside capture is most important. You mustn’t lose as much money now if you generate the majority of your turn through the compounding of a dividend. Dividends are less volatile than earnings, compounding dividends is less volatile than the capital returns on markets, and therefore you can dampen down the volatility of your portfolio to suffer in that environment.
“And then the final thing is valuation suddenly matters again. And this links to volatility, which is when everything just goes up and keeps going to the sky; no one cares about valuation. Everyone buys passive vehicles valuation agnostic and you march things up to city valuations when things become more volatile, when economies become more cyclical, it is far harder for companies to deliver on those expectations, the very high valuations demand of them. And therefore you need to have a valuation discipline again in what you are investing in and not to get sucked into those very high early rated companies.”
Conclusion: Dividend investing offers more than just income—it’s a strategy that can provide stability, compounding growth, and long-term wealth creation. As market conditions evolve, understanding how to select strong dividend payers is crucial. This interview gives valuable insights into how to refine your investment approach.
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