It may be worrying times for investors relying on dividends for yield as the global economy is teetering on the edge of a recession, but abrdn believes fortunately dividends will not vanish in every region.
Talking to FSA, Martin Connaghan, co-manager of the abrdn global dynamic dividend fund, said it is important for investors to invest in companies globally.
For example, during the last financial meltdown in 2008, the MSCI accumulated financial dividends index was down 50% the following year but companies within the staples, healthcare and utilities sector still had positive returns for the year, he noted.
To take another example, when the Covid-19 pandemic hit in 2020, European regulators and governments stopped banks from paying dividends.
“That was a horrendous environment because Europe is a quite important area for this portfolio. But on the other hand, dividend stocks in the United States were up 5% because they stopped buying back stocks and had enough cash to maintain and increase dividends,” said Connaghan.
“In Asia, dividends were pretty much flat in 2020 on the whole. So my point is that if we get a recession, we have always had another option. You would need to have an almost catastrophic economic decline everywhere to see dividends everywhere decline and it’s just never really happened.”
In case of a recession, the flexibility of a global mandate is important for dividend investors, said Connaghan.
Another risk that the market is facing is central banks are being forced to raise interest rates to cope with prolonged inflation, which in turn favours emerging markets.
“Emerging markets have handled inflationary periods and high rates many times before and they are in a different place with regards to the rate hiking cycle compared with major economies,” said Connaghan.
In terms of sector selection, Connaghan is aware that some industries that have outperformed in previous years may not continue to shine should we enter a recession.
“Commodity prices have been buoyed by the conflict between Russia and Ukraine, but it would be interesting to see what happens to the demand for commodities should we enter a recession,” he said.
On the other hand, he believes sectors such as healthcare, staples, utilities and telecommunications should do fine.
“These aren’t the most exciting businesses in the world. But the cash flow dynamics of these companies should be resilient for them to maintain their dividend payouts in any sort of recession.”
Connaghan is one of the co-managers of the abrdn global dynamic dividend fund, which is available to Hong Kong and Singapore retail investors.
The fund has two sleeves, the core sleeve, which represents the majority of the portfolio on a traditional buy and hold approach for both yield and capital appreciation purposes.
The remainder is the dividend capture sleeve, which is used to tactically trade in and out of stocks into dividend events typically from March to May when European companies announce their annual dividends.
Since its inception in October 2020, the fund has posted a cumulative return of 14.4%, compared with the MSCI ACWI return of 15.6% and the international equity sector average of 6.4%, according to FE fundinfo data.