Companies with a history of maintaining and growing their dividends through different market cycles typically exhibit lower volatility and smaller drawdowns during market corrections, according to Jochen Breuer, portfolio manager, Fidelity International
Although the imposition of tariffs is likely to have a detrimental effect on US economic growth, it is “typical for opportunities to present themselves in volatile markets,” he said in commentary released today.
Breuer (pictured) emphasised the “three fundamental building blocks” of long-term investment performance: sustainable dividends, earnings resilience, and valuation discipline.
This resilience reflects both the financial strength required to sustain dividend increases and the stability of the underlying business models, which should provide a “natural buffer against market instability”.
Breuer cited the MSCI AC World Index “Dividend Aristocrats,” which focuses on companies that have grown their dividend each year during the past last 10 years which has outperformed the MSCI AC World Index with lower volatility over the same decade.
“While dividends provide a tangible and direct component of total returns, the sustainability and growth of these dividends ultimately depends on the quality and resilience of a company’s earnings,” said Breuer.
“The future path of a company’s earnings is also the key driver of the price return investors can expect from the stock.”
However, Breuer does not suggest a simple top-down allocation to classically defensive industries.
Instead, it means identifying companies with resilient business models across a broad range of sectors through detailed bottom-up analysis.
“It is this combination of owning resilient businesses that are diversified across a range of industries which results in consistently higher earnings persistence compared to broader market indices,” he said.
Breuer also stressed that investors must combine this focus on high-quality businesses with a valuation discipline to prevent overpaying for businesses and to reduce potential drawdowns in a portfolio.
For instance, since the reassessment of so-called US exceptionalism, many companies Europe have outperformed their respective US peers, partly reflecting their lower starting valuations.
