- Dividend investors have a higher bar, as bond yields have risen.
- Economic fragility may put dividends under some pressure in some areas.
- Diversification, flexibility and revenue reserves are key to ensuring long-term dividend resilience.
There are some notable challenges for dividend investors over the next 12 months. Bond yields are rising and, for the first time in almost a decade, investors can get reasonable income from corporate bonds and, in some areas of the globe, even cash. At the same time, economic fragility creates the risk of weaker corporate earnings and the potential risk of dividend cuts. It is an environment that requires careful navigation.
That said, dividend-paying equities showed their resilience in 2022. The MSCI World High Dividend index held up significantly better than the MSCI World index during the year as investors saw the appeal of dividends – and particularly growing dividends - at a time of higher interest rates and inflation. This is likely to endure into 2023, with the economic situation still uncertain.
Nevertheless, we recognise the challenges in the year ahead. At Murray International, we want to ensure that our income is competitive and that it grows at least in line with inflation over time. Three critical elements in securing this growing dividend stream over time are diversification, flexibility and reserves.
It is nice to have options
There is a genuine possibility that the quantum of positive stock market returns that we have seen over the last decade may be harder to generate over the next ten years. That said, as equity income investors, we have a broad choice of options. Rather than a handful of sectors or countries, we can draw income from across the world and from a vast range of different companies. This gives us a much-welcome degree of flexibility should we see a recession across major economies such as the US, UK or Eurozone.
In previous recessions related to Covid or the Global Financial Crisis, we may have witnessed considerable dividend declines in certain quarters. However, they have never been felt in every sector of the market or geography of the globe all at once. So, in 2009, MSCI ACWI dividends fell 19%. However, this was a very financials-centric problem. While MSCI ACWI Financials dividends were down by 50% in 2009, dividends in Staples, Health Care and Utilities were all up by at least 8%. Similarly, during the Covid pandemic, dividends were down by almost 40% in the UK and 30% in Europe in 2020. Dividends that year were up 5% in North America and were also resilient in areas of Asia. We are very grateful for the global remit that Murray International Trust shareholders give us as there is a great deal of flexibility within it, which can be of significant benefit in uncertain times.
This has been very important in the past 12 months as well. Our holdings in Latin America have been important contributors to returns, such as Chilean lithium group SQM or Mexican airport operator ASUR (Grupo Aeroportuario del Sureste). A number of our mining holdings also did well – Vale and BHP, for example, as did defensive companies such as tobacco group British American Tobacco and US pharmaceutical giant AbbVie.
The trust’s ability to hold fixed income alongside equities can be an advantage. In recent years, we have held emerging market debt, which has provided a boost to the income on the trust. However, as stock market opportunities emerged, we took capital out of fixed income and redirected it towards equities. Currently we have around 8.5% of the trust in fixed income and cash, but have the option to raise or reduce that that holding further, depending on the market environment.
We are also agnostic on the ‘type’ of companies we hold. If a company scores well on key metrics such as cash generation, balance sheet strength, pricing power and looks like it can sustain growth in its dividends, we don’t mind if it is considered to be value or growth, cyclical or defensive, or where it is located. That helps us sustain a balanced portfolio.
We are also attentive on our reserves. As it stands, Murray International has increased its dividend for 18 consecutive years. Holding a significant revenue reserve has helped us deliver that growing pay out to shareholders. We needed to dip into those reserves during the Covid crisis and are now carefully building them back up.
At the moment, we can still find companies that fulfil our criteria despite the gloomy prognoses for the global economy. Over the last twelve months, we have found value in Europe, for example, buying into German industrial giant Siemens, French dairy group Danone and Dutch Semiconductor equipment maker BE Semiconductor.
The banking sector has hit the headlines again recently after the collapse of Silicon Valley Bank created fears of contagion. We are generally cautious about banks, though we have some exposure in Asia, including OCBC in Singapore and SCB in Thailand. We also have some insurance exposure, including Scandinavian insurer Tryg and Zurich Financial in Switzerland. We generally prefer to avoid complexity, which rules out many of the more esoteric financial names.
We do not have an overall outlook for dividends, but we continue to look closely at the companies we own, the kind of earnings and dividends they can deliver and how much we are paying for that. Despite the challenges a fragile economic climate presents, we still see opportunities in the year ahead for the long-term investor.
Risk factors you should consider prior to investing:
• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• With funds investing in bonds there is a risk that interest rate fluctuations could affect the capital value of investments. Where long term interest rates rise, the capital value of shares is likely to fall, and vice versa. In addition to the interest rate risk, bond investments are also exposed to credit risk reflecting the ability of the borrower (i.e. bond issuer) to meet its obligations (i.e. pay the interest on a bond and return the capital on the redemption date). The risk of this happening is usually higher with bonds classified as ‘subinvestment grade’. These may produce a higher level of income but at a higher risk than investments in ‘investment grade’ bonds. In turn, this may have an adverse impact on funds that invest in such bonds.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
Issued by abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK.