What does 2022 have in store for dividend growth?
Stuart Rhodes, manager of M&G Global Dividend, joins Darius McDermott to discuss global dividend...
After a topsy-turvy year, there has been some good news for investors in recent weeks, with companies around the world announcing record dividends as they recover from Covid-19.
Rising profits and strong balance sheets lifted pay-outs 22% to an all-time high of $403.5 billion in the third quarter, according to the latest Janus Henderson Global Dividend Index. An impressive 90% of companies raised dividends – or at least held them steady – during the period, while large special pay-outs boosted the headline total.
“With balance sheets bolstered last year by new equity and debt issuance, and profits on the mend, a lot of the cash generated by companies is finding its way to shareholders in the form of dividends,” it concluded. “Many companies are announcing large scale buy-back programmes, too.”
Dividends in North America proved more resilient during 2020 than other parts of the world due to factors such as a lighter regulatory touch. While that meant the rebound in dividends lagged the global average, growth was still strong with pay-outs rising 10.3% on an underlying basis, which was a record for the quarter.
Canadian dividends rose 6.5% on an underlying basis – their 19th consecutive quarter of growth – while dividends in Europe delivered underlying growth of 28.8%. The UK benefited from a combination of the mining boom, as well as a boost from companies that had cancelled dividends this time last year.
The picture in Asia Pacific excluding Japan was positive – despite a divergence between countries. Overall, eight companies in 10 either increased dividends or held them steady during the period. The report also noted that very few Japanese companies paid dividends in the quarter.
Meanwhile, pay-outs in China rose to $32.6 billion in the quarter, which is an increase of 15.7% on an underlying basis and puts Chinese companies on track for record dividends this year.
Mining dividends have been soaring this year – and were up more than threefold to $54.1 billion in the third quarter. Incredibly, this means it achieved more during one single quarter than it did in its previous full-year record set in 2019.
Elsewhere, three quarters of companies in the oil sector raised or held their dividends. The fact oil prices have been increasing may result in future dividend growth, according to the report.
The success of the mining sector is also illustrated by the study’s breakdown of the world’s biggest dividend payers in the third quarter of this year.
BHP, Rio Tinto, Vale SA and Fortescue Metals Group all made the top five, along with China Construction Bank Corp. The remainder of the top ten consisted of China Mobile Limited, Microsoft Corporation, Gazprom, AT&T, and Exxon Mobil Corp.
According to Janus Henderson, the tremendous performance achieved during the third quarter will make 2021 a great year for pay-outs to investors.
It predicts headline global dividends are expected to jump 15.6% this year to a bumper total of $1.46 trillion, which would beat the pre-pandemic record set in the 12 months to March 2020.
“This means global dividends will fully recover from their March 2021 mid-pandemic low within just nine months, restoring their long-term growth rate back to the 5-6% trend,” it concluded.
The uplift in dividends will be welcomed by income investors – especially given separate research from the Association of Investment Companies found they were seriously impacted by Covid-19.
This study, carried out by Research in Finance, revealed more than four fifths of them (87%) had suffered a loss of income in their investments during the battle with coronavirus.
While dividends haven’t fully recovered from the pandemic, the outlook is brightening for investors, according to Annabel Brodie-Smith, the AIC’s communications director. “Fewer investors are experiencing such a big impact on their portfolios and fewer are having to make hard choices to compensate for the loss of income,” she said.
Annabel Brodie-Smith also insisted that investment companies’ income advantages had been important for investors over the past year. “Their ability to use a revenue reserve, invest in a wider range of income-generating assets, and use capital profits to top up dividends has helped investment companies deliver income when investors needed it most,” she said.
The Murray International Trust, for example, aims to achieve an above average dividend yield, with long-term growth in dividends and capital ahead of inflation.
The company principally invests in global equities, with its portfolio include giants such as Taiwan Semiconductor, Philip Morris, Cisco Systems and Pepsico*.
Its latest factsheet highlighted the increasingly positive experience of many such companies in its internationally-diversified portfolio. “Over the period, the majority of underlying investment holdings reported earnings and dividends that exceeded expectations which proved very supportive to underlying portfolio valuations,” it stated.
Other funds to consider
There are a number of open-ended funds for whom a healthy dividend environment is a major positive. A prime example is Fidelity Global Dividend, which is managed by Dan Roberts.
When considering investment opportunities, he places a large emphasis on the sustainability of the dividend – and whether the current share price provides an adequate margin of safety.
He invests across a variety of sectors and geographies, focusing on companies with predictable, consistent cash flows, understandable business models, and little or no debt.
At present, the United States has the largest geographical weighting of 30.7%, followed by the United Kingdom with 14.3%, France with 8.5% and Germany on 7.4**. Its largest stock positions, meanwhile, are Procter & Gamble and Unilever, which account for 4.4% and 4.2% of assets under management respectively**.
Then there is the M&G Global Dividend fund, which has been run by Stuart Rhodes for more than 13 years, that has three stated aims. These are to increase the income stream every year, provide a dividend yield above that available from the MSCI All Country World Index over any five-year period, and to provide combined income and capital growth that is higher than that of the index over any five-year period.
According to the most recent fund factsheet, materials is the largest industry exposure at 19.2%, followed by 17.7% in consumer staples, and 13.8% in information technology*.
Its largest stock holding, meanwhile, is in Methanex. This accounts for 8.5% of assets under management, followed by 6.9% in Imperial Brands and 6.5% in Gibson Energy*.
*Source: fund factsheet, 31 October 2021
**Source: fund factsheet, 30 November 2021