Global dividends – a dependable source of return in uncertain times?

Ben Sheehan, Senior Investment Specialist, abrdn

Dividend paying companies may also offer a mitigation strategy against inflation

With inflation on the rise and interest rates set to increase from historic lows, there’s no doubt that investors are considering their options and working out how best to navigate this changing environment.

Bonds face challenges in a rising rate environment – in the year to date (10 May), the Bloomberg Global Aggregate Index, an index of investment-grade bonds, was down 12% in USD termsi. Risk assets like equities also face challenges, as rising rates may lower what investors are willing to pay for potential future cashflows. Holding cash may not be ideal because inflation will erode its value in real terms. However, one sweet spot for the current environment could be found in dividend-paying equities.

The good news is that we appear to be entering a favourable period for companies that can grow and pay dividends. During periods of high inflation – greater than 5% – companies that pay high dividends tend to do better versus the broader equity market. This is according to research from Goldman Sachs, with a data set for the S&P500 that goes back to 1940, which suggests that a focus on dividends could provide inflation mitigationii.

To further bolster this, in the high-inflation 1970s, the S&P500 delivered total returns of 77% in USD termsiii. Of these total returns, about three-quarters were attributable to dividends and dividends reinvested. Looking at the last 20 years, dividends and dividends reinvested have made up about half of the total returns of the MSCI AC World Indexiv. In other words, half of the 315% returns (in the 20 years ending 30 April 2022). Dividends are a very important component of total returns even in a moderate- to low-inflationary environment. They are likely to be an even more important component as inflationary pressures mount.

What about the current dividend environment?

Dividends are currently in abundance and the outlook for dividend growth appears positive. In the 12 months ending 31 March 2022, the companies in the MSCI AC World index paid out almost USD1.3 trillion (tn) in dividendsv. In 2021, the dividends global companies paid in the index were 17% higher than 2020vi. The global economic recovery has supported both an earnings recovery and a dividend recovery from the lows of the 2020 Covid-19 recession.

Even in 2020, amidst the economic and earnings headwinds, members of the index paid out over USD1tn in dividendsvii. This underscores the resilience of dividends and their dependability as a source of return across the market cycle. Looking ahead, company earnings are expected to grow around 10% in 2022viii and we should expect to see a similar growth in dividends. Despite accumulating worries around higher input costs due to inflation, higher costs of capital, and the potential effects on margins, the most recent quarterly earnings results have been very encouraging. Of the 80% of S&P500 companies that have reported on their first quarter earnings, 80% have beaten estimatesix. There has also been a pick-up in share buybacks. This points to the confidence that companies have in rewarding shareholders, and bodes well for the dividend outlook.

On top of this, the cash on company balance sheets is at historic highs and the pay-out ratios remain historically relatively low. Pay-out ratios are the percentage of profits returned to investors as dividends and for the MSCI AC World the pay-out ratio is currently 42%x. This compares with an average of 58% over the last 15 yearsxi. Overall, conditions remain supportive for dividends and many companies have the potential to pay out a higher level of profits earned as dividends.

Where are we seeing opportunities?

The energy, materials, real estate and industrials sectors have seen the fastest pick up in earnings and pay-outs. Banks and financials are also seeing their margins expand. Further, cash piles are high in sectors including healthcare and technology, so the prospect for dividend payments remains positive across a broad base of sectors.

Companies that pay good dividends often have sound environmental, social and governance (ESG) credentials. We build ESG analysis into all our investment research. We have an ‘engage-ist’ mindset with the companies in which we invest because we aim to raise ESG standards across the corporate sector.

Finally, valuations for global equities remain reasonable. The MSCI AC World is currently trading at 15.0x on a forward price-to-earnings basis, which is well below the five-year average of 17.6xxii. Despite recent market turbulence, interest-rate hike expectations, and inflationary pressures, much of the risk is already priced in.

To counter inflation risk, we would suggest considering an allocation to global equity dividends. Dividends provide a dependable source of return and there are opportunities to be found right across the globe.

Important information:

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 Aberdeen Asset Managers Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Authorised and regulated by the Financial Conduct Authority in the UK.

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i Bloomberg, May 2022

ii Goldman Sachs February 2022

iii Goldman Sachs February 2022

iv Jefferies, Factset April 2022

v Bloomberg April 2022

vi Bloomberg, MSCI, abrdn May 2022

vii Bloomberg, MSCI, abrdn May 2022

viii Bloomberg consensus forecasts May 2022

ix JP Morgan May 2022

x Bloomberg, MSCI May 2022

xi Bloomberg, MSCI May 2022

xii Bloomberg, MSCI May 2022