In our view, dividends are one of the most powerful engines of shares markets and this statement reflects the convictions I have forged since 2008.
Since then, I have devoted my career to this issue of dividends to fully capitalise on it. And my convictions have stood the test of fifteen years of practice marked by many challenges and two crises in the financial markets: the 2008 financial crisis and the 2020–2021 pandemic.
In the face of inflation returning, this strategy could reveal its good results and protective qualities.
I am often asked, rightly, why it is relevant to focus on firms that pay dividends – because dividends do not increase shareholders’ assets, contrary to a preconceived idea. All else being equal, the price of a share should decrease in proportion to the coupon paid when it is clipped.
The main reason for this is that firms struggle to reinvest all their profits optimally and it is also hard for them to identify the right projects without ever making mistakes.
Over time, our opinion is that they become less disciplined. They make mistakes and become exposed to projects that do not pay well or even cause loss. This ends up putting their shareholders at a disadvantage. However, in my opinion, firms that aim to pay dividends, usually keep a tighter rein on their spending and they try to choose projects more wisely.
Still, we prefer growth dividends to high dividends. High dividends can betray the woes of a struggling firm – one too bogged down in debt or going through a critical change.
The average rate of dividends in our strategy is in a reasonable range of 3% to 4%. But we aim for a potential annual growth of 5% to 10%*.
I have always managed this strategy in a context of stability or falling consumer price indexes. But this strategy now seems to prove its worth with the return of inflation. I believe that only growth dividends have the potential to offer real positive yields. High dividends are tempting at first glance, but in my view, they are unable to grow so they do not protect against inflation.
To ensure your assets do not decrease in value, in my view you have to invest in good stocks, of course, but also in firms whose dividend growth rate is the same as, or exceeds, the rate of inflation.
Our approach should continue bearing fruit in coming years – provided the right stocks are chosen. That is the challenge we rise to.
To meet this challenge, a good starting point is to look in the rear-view mirror to identify boards that take dividend growth seriously.
Yet this policy has to be pursued going forward in the firms concerned. And we operate with this in mind, focusing on the firms we feel more promising in the next ten years.
The US represents the biggest share of our investment universe, even though Wall Street is more associated with major growth stocks. Hundreds of US shares are eligible for dividend investing. A considerable pool is also available in Western Europe, Australia and Canada. And prospects are brightening up in Japan after some tough years.
We find firms that best meet our criteria in the most defensive sectors, especially in everyday consumer goods and health.
For more cyclical sectors, it is a bit harder to select stocks but we could find interesting pockets for instance in technology transportation or semiconductors..
Opinion tribune by Stuart Rhodes, fund manager at M&G Investments
*Parameters set by the Adviser are subject to change. There is no guarantee that a company will continually pay or increase its dividend.
The value of a fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. The views expressed in this document should not be taken as a recommendation, advice or forecast. Investing involves risk, including the loss of principal. Whenever performance is mentioned, past performance is not a guide to future performance.
For Investment Professionals only and Institutional Investors. Not for onward distribution. No other persons should rely on any information contained within. The views expressed represent the opinions of M&G Investments which are subject to change and are not intended as investment advice or a forecast or guarantee of future results. Stated information is provided for informational purposes only. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While M&G Investments believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. This financial promotion is issued by M&G Luxembourg S.A. The registered office is 16, boulevard Royal, L-2449, Luxembourg.
