The harsh economic fallout caused by the global coronavirus pandemic may seem a perverse time to highlight the benefits that dividend income can bring to investment portfolios.
After all, companies worldwide slashed their dividend payouts in the second quarter of this year to their lowest level in more than a decade. Expectations for aggregate dividend payouts over the next 12 months have dropped recently by about 15% (see chart 1).
Chart 1: Dividend pay-outs from global equities 2005 to 2020
Source: MSCI AC World Total Return Net, Bloomberg, September 2020. Data above is based on dividend per share of MSCI AC World Total Return Net from Sep 2005 to Sep 2020. Past performance is not a guide to future results.
But investors should look beyond alarmist headlines and focus on the facts: companies still paid shareholders $382bn1 in dividends in the second quarter despite the global economic shutdown. It underlines how the vast majority of stocks continued to pay dividends even during a crisis.
But it’s important for investors to distinguish between companies cutting dividends due to cash-flow difficulties and those that were compelled to do so by regulators and governments. Many of the latter were in a position to continue paying dividends, and will surely resume when permitted.
At the same time, the pandemic has not impacted all companies equally. Firms operating in sectors such as travel, leisure and construction have been among the hardest hit. Yet others are benefitting from changes in work and consumption patterns in areas such as cloud computing and online services.
Inevitably it means some companies will be better placed to sustain their earnings and dividend payments than others. When it comes to dividend investing, investors can actively reduce their direct exposure to the virus’ impact and to stocks where they anticipate unwanted tail risks. At the same time, they can target companies with the strongest balance sheets and competitive positioning to sustain their payouts.
In many cases, payment of a dividend can act a good proxy for the quality of a company’s management and governance. Research from financial services firm Jefferies shows how quality stocks tend to avoid the worst of the dividend cuts, with a strong correlation between board independence and dividend payout.2
Investor opportunity
More than just sustainability, investors should also be mindful of the opportunity that the global universe of dividend-paying stocks presents. Due to the sharp compression in bond yields, equities have offered a higher average yield than bonds since 2011 (see chart 2). We expect no let-up in this trend given the enormous pool of low and negatively yielding bonds, which now stands at $15trn globally.
Chart 2: Equities offered a higher average yield than bonds since 2011
Source: Société GénéraleCross Asset Research/Equity Quant, Bloomberg, September 2020. Past performance is not a guide to future results
Ageing global demographics also point to continued strong demand for income as people increasingly look to save for their retirement. This growing pool of capital seeking income provides a strong incentive for companies to continue paying dividends.
Despite all the headlines about cutbacks in dividend pay-outs, investors should take heart that there remains a broad base of dividend-paying companies to choose from, particularly when they search for them globally.
Aberdeen Standard Investments offers a unique proposition to fulfil your clients’ income needs. The Aberdeen Standard SICAV I – Global Dynamic Dividend Fund aims to provide a premium monthly dividend payout3 as well as benefit from capital appreciation via our high conviction global equities portfolio. Speak to your local Aberdeen Standard Investments’ representative or visit www.aberdeenstandard.com.sg for more information.
- https://www.ft.com/content/a136da68-4cc8-489f-9265-a719b11f75e6
- Microstrategy – Dividend Playbook 2020, Jefferies
- Aims at monthly distribution. Dividend rate is not guaranteed, dividend may be paid out of capital. Any dividends paid and distributed out of the fund’s capital will result in an immediate reduction of the fund’s Net Asset Value per share. The fund is actively managed. It aims to outperform the MSCI AC World Total Return Index with a dividend yield greater than that of the benchmark before charges.
Disclaimers
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Bloomberg data are for illustrative purposes only. No assumptions regarding future performance should be made.
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