This is not just a developed market phenomenon which the U.S. has led in recent years. Global dividends are forecast to rise 6.1 percent in 2018 with expansion coming from every region of the world. Companies in China, Russia, Japan and Hong Kong have all made notable increases in total dividends paid, according to Janus Henderson’s data.
Which is good news for income seekers with an international mindset because relying on a single country income ETF (exchange-traded fund) or actively managed fund can over-concentrate investors in a few sectors, i.e. banks, utilities, energy and telecoms. This is particularly true of the U.K. which has a deep culture of equity income investing, but has witnessed Brexit related outflows over the last year.
In the end, says Lofthouse, run the slide rule carefully over your chosen investment. “Balance sheet strength and free cash flow are both critical to the sustainability of dividends.” Key is the so-called dividend cover ratio, or how many times the net income can cover the dividend. Anything less than two-times could be worrisome. He believes some industry sectors are more attractive than others at the moment. “Telecoms is the only sector that hasn’t grown dividends this year. While oil companies have, but are not getting re-rated because the market trades on sentiment, so we might have to wait a year or so to see that happen,” Lofthouse added.
And sentiment, and a view on the growth cycle, is critical to this story. It comes down to market investing style and fashion, says Stephen Macklow-Smith, head of European equity strategy at J.P. Morgan Asset Management. “At the moment markets are more interested in growth than value or income,” he said. Although Macklow-Smith, who has recently been doing some work on this trend, added: “While income style investing is highly correlated with value, unusually, income has outperformed value by 70-80 percent over the last few years.”
So is it time to raise the income weighting in your portfolio? Macklow-Smith says watch the corporate reporting season, and whether it still underpins the growth rather than income approach, “continued strong economic and earnings growth should help to support further gains for U.S. equities, along with other less expensive equity markets. Therefore, yield stocks may underperform the overall market because of the style bias.”
In other words, while record amounts of money are being pushed back to shareholders through rising dividend payouts, the sweet spot for rising capital returns from these companies may still be in the future.
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