Dividend investing around the world

The latest UK Dividend Monitor from Link Group suggests that UK dividends may not regain their previous highs until 2025 at the very earliest. In what was rather bleak news for income investors, the report highlighted that eight years of growth had been wiped off UK dividends in 2020, with two thirds of companies cancelling or cutting their dividends in response to the pandemic lockdowns and dividends falling 30-35% in total*.

The timeline to recovery is backed-up by Murray International Trust manager Bruce Stout who says that while markets have tended to recover quickly from a recession, the last six ‘dividend recessions’ experienced in the past 100 years have taken much longer to recover –it takes roughly four to five years for companies to rebuild 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.

So what can income investors do?

A handful of UK equity income funds have managed to do better than the market when it comes to dividend cuts: Rathbone Income and TB Evenlode Income saw their dividends fall by a much lower 20-25%, for example.

Being able to pick certain stocks that may recover faster also helps. As Siddarth Chand Lall, manager of Marlborough Multi Cap Income fund, pointed out: “Having previously announced a blanket ban on dividends for banks, the Prudential Regulation Authority has now allowed UK banks to restart dividends, which is earlier than expected. We are no longer seeing a deterioration in the dividends being paid by companies and, as was the case last month, the number of companies reinstating dividends has risen again. The tone is very clearly one of recovery and growth with the odd special dividend also being announced once again.”

Going overseas is also an option.

The MSCI World index saw dividends fall 12.3% in 2020 vs 2019. While most individual country stock markets saw hefty dividend cuts, some were less exaggerated than others.

Europe:

Elite Rated fund options: LF Montanaro European Income and BlackRock Continental European Income

In Europe, the overall EuroSTOXX Index dividend declined by over 30% in 2020 compared to 2019; 25% of all companies in the Index cancelled their dividend and a further 25% reduced their dividend^.

But Andreas Zoellinger, manager of the BlackRock fund, is very optimistic. “Right now is actually a very exciting time for income investing,” he said. “2020 was a tumultuous year with many companies cancelling or suspending their dividends, either for corporate governance or regulatory reasons. With earnings expected to recover strongly in 2021, we expect dividends to get back to more ‘normal’ levels this year. However, investors will need to remain selective to avoid value traps.”

Emerging Markets

Elite Rated fund optionsGuinness Emerging Markets Equity Income and Magna Emerging Markets Dividend

Emerging market dividends fared better than the UK, falling just under 19%, with local regulators stopping some dividends being paid in areas like financials. Both our Elite Radar funds in this category did better than the benchmark though, with dividends on the Guinness fund falling 5% and the Magna fund dividend flat year on year.

Ian Simmons, manager of Elite Radar Magna Emerging Markets Dividend, told us more about emerging market dividends in this recent video interview:

Asia

Elite Rated fund options: Jupiter Asian Income and Guinness Asian Equity Income

The Asian market index now yields about 2% – down more than 20% since the crisis. But again, funds have been able to protect their dividend payments better. Jupiter Asian Income is currently yielding 2.5% while the Guinness Asian Equity Income fund has a yield of 3.2.

Co-manager of the Guinness fund, Edmund Harris said, “Asia is expected to lead world growth again this year and, when earnings recover, we expect dividends to recover. The region has handled COVID better having had the experience of SARS and with populations that do as the government tells them – it means lockdown have been more effective. Governments have also spent less than developed markets in their fiscal response to the pandemic and consumer confidence also higher.

US

Elite Rated fund options: JPM US Equity Income

The S&P 500 was more robust than most markets when it came to dividends and payouts were on a par with 2019. This resilience owed to a culture of progressive dividend policies, a focus on share buybacks, and more conservative payout ratios.

Last October, Fiona Harris, investment specialist for the JPM US Equity Income fund, told us that just 13% of S&P 500 companies cut or suspended their payments while more than 40% had raised or started them. Here more in this podcast:

Japan

Elite Rated fund options: Baillie Gifford Japanese Income Growth

Pre-Covid, 55% of Japanese companies held net cash, the highest amount in the world. The Japanese dividend payout ratio in contrast was very low compared with global peers at about 30%. This conservatism paid off in 2020, giving balance sheets stability and giving Japanese companies room for growth – they were not forced to cut dividends in the same way as other countries.

 

*Link Group UK Dividend Monitor, Q4 2020
**Source: Aberdeen/Standard website – Edison Research Note
^Source: Guinness Asset Management and SocGen, 20 January 2021

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.