Is it time to get defensive?
Equities around the world have enjoyed an incredibly strong bounce back since the Covid-19 crash,...
While global markets have staged a strong recovery since the pandemic lows in March 2020, global dividends are taking longer to recover.
According to Janus Henderson, global pay-outs fell 12.2% in 2020, equivalent to an underlying fall of 10.5% or a total of $220 billion*. One company in eight cancelled its pay out altogether and one in five made a cut*. Those cuts were most severe in the UK, Europe and Australia*.
Global stock markets, which fell some 30% in the weeks leading up to the first lockdown, took just 6 months to recover. That dividends have not recovered so quickly is not a surprise. Data going back over the past 100 years shows that in the last six dividend recessions, companies have taken four to five years to replenish their balance sheets. This is because share prices react in advance of economic improvement, whereas dividends don’t pick up until after companies’ financials improve.
But the good news is that while all a large number of companies cut or cancelled dividends, two-thirds of global companies managed to raise or hold steady their pay-outs*. Others are starting to reinstate them already.
Dividends may continue to fall in the first part of the year, but in Janus Henderson’s best case scenario, they could rise by 5% by the end of 2021.
This is significant not just for income investors but also those that reinvest their dividends. For example, at the time of writing, the FTSE 100 is trading at just over 7,000 – close to where it was on 31 December 1999, more than 21 years ago**.
In terms of price returns, this means the FTSE 100 has made a loss of -0.1% in that time, but if investors reinvested their dividends, their total return would be 113.41%**. Dividends have the same impact in other stock markets around the world.
Despite a tough year for dividends, three Elite Rated global equity income funds and trusts managed to raise their pay-outs:
M&G Global Dividend
The fund managed to increase its dividend payment despite the crisis last year and the manager believes it is well-placed to continue this growth. In recent months the manager has added some financials exposure, and defensive names like NextEra Energy and Walmart – a typical dividend grower and an opportunity to get in at a good price. Other stocks that had done well have been sold like Orsted & Richemont^.
Fidelity Global Dividend
Only around 10% of this fund’s holdings cut or suspended dividends last year – some of which were regulatory – with the remaining 90% experiencing growth. The fund also benefitted from a couple of special dividends from an auto/home insurance company, which had fewer accident rates and better results than expected, as well as from Samsung. The manager is expecting the dividends that were cut to be reinstated and says that hose that grew last year should be able to do so this year too^.
In its latest annual report, the board of this trust said: “Despite the difficult economic environment three interim dividends of 12.0p per share had been declared during the year. The Board has also recommended a final dividend of 18.5p per share which is subject to shareholder approval. Subject to this approval, total Ordinary dividends for the year will amount to 54.5p, an increase of 1.9%. This represents the 16th year of dividend increases for the Company and cements its position as an AIC ‘Next Generation Dividend Hero’.
*Source: Janus Henderson Global Dividend Index, edition 29
**As at 5 May 2021
***Source: FE fundinfo, 31 December 1999 to 5 May 2021
^Source: fund manager meetings, April 2021