Overview
It's true that growth stocks, which rise on the promise of future expansion and trends like AI, have been responsible for the post-pandemic surge in equity markets. But don’t forget their more mundane counterparts. Because over long periods of time, reinvesting the dividends that many of the market’s more traditional companies pay out is just as important as capital appreciation.
On a global basis, price rises and reinvested dividend returns have accounted for roughly half of total returns over the last 20 years. But there can be significant regional variations depending on the prevailing dividend culture.
In Europe, for instance, company management teams typically prioritise cash payments to shareholders. It’s historically been the opposite case in Asia, though governments have recently been pushing for more friendly shareholder practices. In the US, share buybacks are often favoured by management. So the global reading is also warped somewhat by this tendency of US companies in recent years to buy back shares rather than expand dividends.
It does pay to be discerning in how you select your dividend-payers. The highest headline yields in the market are often symptomatic of underlying structural profitability but can also point to balance sheet issues and therefore low probability of the dividend continuing to be paid.
Consistent dividend growers, however, have delivered particularly favourable outcomes. The MSCI AC World Index ‘Dividend Aristocrats’, which focuses on companies that have grown their dividend each year over the last 10 years, has outperformed the MSCI AC World Index, with lower volatility, over the past decade.1
Management should be good capital allocators
There is a balance here, of course. A non-life insurer with relatively low long-term growth and capital investment demands may return a high percentage of profits to shareholders as cash. You would expect something different from a capital-intensive semiconductor manufacturer with higher growth prospects, for example.
But many companies fail to get that balance right, holding cash back from shareholders to grow into areas outside of their core competence, or splurging it on unsuitable acquisitions whose value is subsequently written down. Good managers, by this measure, are good capital allocators. And good capital allocators pay sustainable and growing dividends, which in turn drive long term total returns - whatever the current weather.
An earlier version of this article appeared online in April, titled 'Chart Room: The dividend pay-off'.
[1] Source: Citi Research, as at 31/03/2024 in USD, The universe is divided into Dividend Aristocrats which are companies that have been able to grow their dividends each year over 10-years and the total and price cumulative returns and volatility of returns of that basket of companies. This is compared to the broader MSCI AC World universe where the same figures are calculated. In March 2024 there were 309 Dividend Aristocrats. Price return is the rate of return on an investment portfolio over a given period of time, where the return takes into account only the capital appreciation of the portfolio (the income generated by the assets in the portfolio in the form of interest and dividends is ignored). Total return is the actual rate of return including interest, capital gains, dividends and distributions realised over a given period of time.
