The real deal in inflationary times

The return of inflation has wreaked havoc among global financial markets: rising bond yields have tarnished fixed income’s reputation as a safe-haven asset class, while equity markets have been left reeling from an abrupt reality check for growth. Speculative stocks have borne the brunt of a sharp selloff as exorbitant prices and wild expectations were duly reined back. Despite a recent revival, many new economy stocks are trading well below their previous highs.

Here, Stuart Rhodes, manager of the M&G Global Dividend fund explains why, in these uncertain times, dividend growth is even more important than ever.

Investors have sought refuge in dividend stocks and the potential of a reliable stream of steady income, but we would strongly argue that the comfort of safety is not enough in the current environment. Investors need growth in their income streams to protect against the ravages of inflation. We cannot emphasise the importance of dividend growth strongly enough.

While inflation has fallen from its peak, UK Consumer Prices Index (CPI) and Retail Prices Index (RPI) remain stubbornly high at 8.7% – a high hurdle rate for real growth and inflation protection. Fortunately, corporate cashflows have remained robust around the world, particularly in the US, to allow the momentum in global dividend growth to continue, with a wide array of companies delivering inflation-beating growth.

^{Source: M&G, ONS, 19 April 2023, Past performance is not a guide to future performance.}

The M&G Global Dividend fund, which focuses on dividend growers worldwide, increased its distribution for the financial year ended 31 March 2023 by 16.6%*, comfortably outpacing the UK’s double-digit rate of inflation. The technology sector continued to provide a source of impressive dividend growth, with significant contributions from KLA Corp, ASML, Analog Devices and Broadcom in semiconductors. Microsoft extended its long track record of dividend growth with a 10% increase. In the more defensive sectors of healthcare and consumer staples, the likes of Bristol Myers Squibb and PepsiCo raised their dividends in the core 5-15% range.

The opportunity to provide inflation protection with a rising income stream has not been a flash in the pan. Since its launch in 2008, the M&G Global Dividend fund has increased its distribution with an average annual growth rate of 7.3%, comfortably ahead of UK CPI and RPI which have averaged at 2.9% and 4.0% respectively over that time.

^{Source: M&G, ONS, 19 April 2023}

Real growth in the income stream has been achieved without compromising total return (the combination of capital and income). The M&G Global Dividend fund delivered a positive return in a falling market in the 12 months to 31 March 2023, with an average annual total return of 11.1% since its launch almost 15 years ago. The fund has outperformed the MSCI ACWI Index, which returned an annualised 10.6% during that time, while providing an income stream which has increased every year, in line with the fund’s objective. The fund also aims to provide a yield premium to global equities. The fund’s yield stands at 3.2%, compared to the MSCI ACWI Index’s 2.2%.

Global financial markets remain transfixed by lingering concerns about persistent inflation, the path of interest rates and the prospect of a recession, but we are encouraged by the attractive opportunities being presented at the stock level. Uncertainties in the macroeconomic environment, which have been exacerbated more recently by developments in the US banking industry, have led to indiscriminate selling. The severity of the declines is creating favourable entry points, in our view, for some world class companies with rock-solid balance sheets and excellent long-term growth potential.

Being selective will be paramount. Balance sheet strength is a key consideration in our fundamental research to ensure that dividends are sustainable in the current climate. Dividend cuts will be inevitable for companies not equipped with the financial armoury to withstand an economic downturn. We take comfort from the fact that many of our holdings are carrying net cash. Capitalising on these exceptional opportunities will ultimately determine fund performance in the years to come and we remain optimistic about the future.

*Sterling I Inc shares, preliminary data subject to change

This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.