Almost exactly three years ago, I penned an article titled ‘The Dividend Dilemma’. It was the depths of the Covid-induced market selloff; companies were cutting or suspending dividends left, right and center; and analysts were predicting big cuts to global dividends from which they would take years to recover. I anticipated a fall of around 30%.
Yet for all the cataclysmic predictions, payouts took just one year to bounce back. 2021 was a record-setting year for global dividends at $1.47 trillion, a mark that was bettered in 2022 at $1.56 trillion and is forecasted to be exceeded yet again in 2023 at an estimated $1.60 trillion (see Exhibit 1).
We have now gone from the dividend dilemma to the dividend deluge. With 2022 also setting a record for share buyback authorizations, the picture is clear – companies are returning record amounts of capital to shareholders.
The volatility we saw across asset classes last year served as a reminder that dividends are typically much less variable than earnings and can provide an important source of total return in challenging markets. Dividends also have a solid track record of keeping pace with inflation and while annual growth wasn’t quite the low double digit level that we saw inflation hit at its peak, there was less erosion in real terms than we saw in payouts from most other asset classes.
So where does this leave us now? Deep value areas of the market, characterized by companies with lower-quality earnings and high debt levels had their day in the sun last year. Such rallies tend to be sharp but also short-lived, which played out in the first quarter of this year as we saw momentum fade abruptly. Investors are likely questioning whether such companies can continue to be successful in a slowing growth (or recessionary) environment. In addition, with interest rates looking like they will be higher for longer, indebted companies will likely see more of their cashflow eaten up by interest payments, rather than being available to distribute to
shareholders.
In contrast to the riskier, deep-value end of the market, we believe a focus on ‘quality’ dividend paying companies, those with strong balance sheets and high returns on equity, can be a powerful factor over time. As shown in Exhibit 2, the top quintile of companies, based on quality1 within the MSCI All Country World Index, has significantly outperformed the wider market over time.
This quality approach will, we believe, be especially important if the harsher economic conditions that many expect come to fruition. Indeed, despite the uncertainty in the market right now, over two-thirds of the companies within a representative global equity income portfolio have increased their dividends in the first quarter of 2023.
These increases suggest companies are generating plentiful free cash flow, and returning it to shareholders is signaling, what we believe is, a healthy confidence in their financial situation.
A few examples of high dividend increases include:
What is striking about these examples is not only the magnitude of the increases but also the diversity of the companies involved, on both a geographical and sectoral basis, which implies broad-based strength.
All of this suggests we may be in a golden period for dividend investing. Companies are returning record amounts of capital to shareholders and are doing so while recording payout ratios that are below long-term averages, meaning these dividends should remain even in the face of slowing growth.
Dividend strategies themselves tend to come into their own in more choppy market environments, where income streams become an even more crucial part of total returns and a lower beta approach may offer some protection from volatility. This serves to highlight the excellent shape of global dividends and should provide equity income investors with significant opportunities – despite volatility, they remain well positioned in the market.
Piece of opinion by Mark Peden, Investment Manager of Aegon Asset Management.
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