Sustainable dividend growth is often a hallmark of quality and capital discipline in a business. Companies that consistently return cash while reinvesting for future growth tend to benefit from durable competitive advantages, strong balance sheets and resilient cash flows. The sustainability of dividends is therefore a core pillar of our investment process.
As active, bottom-up investors, we target attractively valued firms offering structural growth and the ability to compound dividends over a three-to five-year horizon. To find them, we seek companies with robust business models, effective capital allocation and financial strength, which enable them to reinvest at attractive returns while steadily increasing payouts. Long-term wealth creation comes from businesses that can profitably reinvest cash flows over time. The following stocks illustrate our philosophy.
Three European stocks to consider for your portfolio
ASML (Amsterdam: ASML) is the world's leading supplier of photolithography systems to the semiconductor industry. It serves 17 of the top 20 chip manufacturers and is the sole provider of extreme ultraviolet (EUV) lithography systems: technology essential for manufacturing the most advanced semiconductors. This unique positioning effectively grants ASML a monopoly in EUV, underpinning significant pricing power and structural growth.
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As AI, cloud computing and the proliferation of software accelerate digitalisation and the demand for increasingly complex chips, ASML offers impressive long-term growth prospects. Gross margins exceed 50% and free cash flow-conversion is strong.
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Combined with formidable technological barriers to entry, these characteristics define a high-quality franchise capable of compounding value over the long term. The dividend has grown steadily over many years and would yield around 30% based on our entry price. Compounding companies are not confined to the technology sector. In healthcare, Roche (Zurich: ROG) is a global leader with top-tier positions in oncology, immunology, neuroscience, virology and diagnostics. Despite industry headwinds including patent expiries and the post-Covid normalisation in pharma's revenues, Roche has shown it can sustain profit growth. This resilience reflects its diversified portfolio, innovative pipeline and rigorous risk management. Recent clinical successes in areas such as breast cancer and multiple sclerosis have bolstered its long-term growth prospects.
Disciplined capital allocation is key to Roche's strategy. It consistently leads the industry in research and development spending, prioritising long-term innovation while generating attractive returns on investment. This has supported its progressive dividend policy, with payouts rising for more than 30 consecutive years.
Sanpaolo (Milan: ISP) is Italy's largest banking group. The European banking sector is structurally stronger than at any time since the financial crisis. Capital ratios are far higher and risk exposure on balance sheets has declined; cost structures have improved and net-interest income has climbed sustainably. Yet valuations still reflect legacy concerns. Intesa stands out for its diversified business mix, strong profitability and disciplined risk management. It is well capitalised and operationally efficient, underpinned by a stable retail-deposit base. While earnings growth may moderate as rates normalise, the bank's conservative leverage and limited reliance on capital markets continue to bode well. Intesa's attractive dividend yield and resilience under stress make it a compelling long-term investment.
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