What’s the outlook for global dividends?
Over the past 100 years, there have been at least four periods when dividends have fallen sharply....
It’s a well-known fact that it’s difficult to find a good, actively-managed US equity fund, which consistently outperforms the index. It’s even more difficult to find a good US equity fund that produces a decent yield. Most struggle to pay 2%, which is approximately half the amount of many UK equity income funds.
Why is this? Well, there is the 15% withholding tax that is payable for starters, but a lot of the problem historically has been that US companies have seen dividends as a sign of weakness – their payment means you are not growing any more. For such an entrepreneurial society, you can see why this might be seen as a negative. However, when you look at the results of the US companies that have consistently paid a growing dividend compared with the rest of the market, it is very hard to see why this should still be the view.
The S&P 500 Dividend Aristocrats Index, which is made up of companies that have increased their dividend payments every year for 25 years or more, has outperformed the market by 2.88% a year over the past decade. Of these companies, there are 16 that have managed to grow their dividends for 50 years or more, amongst them Coca Cola and Johnson & Johnson.
Add to this the fact that, with an ageing population, not only in the US, but many other countries around the world, investor demand for income is only going to increase, and you would expect companies to be doing more to meet this need. It’s not that US companies don’t pay dividends – they do – $400bn a year in fact – they just don’t pay very big ones.
So it’s encouraging when you see data that suggests that more US companies are paying dividends and that these dividends are increasing. The latest edition of the Henderson Global Dividend Index* (HGDI) revealed that US dividends rose 23.4% last quarter, with strong growth across almost all sectors (with the exception of mining and tobacco). Excluding the special dividend from Kraft after its merger with Heinz, US dividends are up by 10% year-on-year and have almost doubled in less than six years.
As Chris Bowie at TwentyFour Asset Management pointed out recently, however, what we don’t want is for US companies to increase their balance sheets in order to engage in shareholder-friendly activity at the expense of the bondholder.
The example he used was McDonalds. The company has just announced that it will issue $10 billion of fresh debt as part of a plan to return $30 billion to shareholders over the next three years. In other words, they are borrowing money to give to shareholders, which has resulted in their credit rating falling. Bonds then see yields increase but capital fall.
Assuming most US companies act in a sensible manner, however, there is a real opportunity for the US to grow its dividend culture, and with that, an opportunity for US equity funds to increase their own dividend payments.
At the moment we only have one Elite Rated US equity income fund: JPM US Equity Income, which yields 2.15%. However, we also have three Elite Rated Global Equity Income funds. Legg Mason IF Clearbridge Global Equity Income has the smallest weighting to US companies (10%) and a yield of 3.8%. Artemis Global Income is second in terms of US holdings, with 29% and a yield of 3.8%. Newton Global Income has the largest amount invested in US companies at 46% and a yield of 3.7%. So there are other ways of increasing your exposure to the world’s largest economy and still enjoy a decent level of income,
*The Henderson Global Dividend Index is a long-term study into global dividend trends. It measures the progress that global firms are making in paying their investors an income on their capital, taking 2009 as a base year (index value 100). The index breaks down by region, industry and sector, in dollar terms. The data has been sourced from the 8th edition, published in November 2015 and relating to dividends paid in the third quarter of the year.