Unmasking the opportunity in dividends

Ben Sheehan, Senior Investment Specialist, Equities,
Asia Pacific, Aberdeen Standard Investments

Recent headlines may highlight cutbacks in pay-outs, but the global universe of dividend-paying stocks is vast and diversified with a long track record of growth.

The harsh economic fallout of a global coronavirus pandemic may seem a perverse time to highlight the benefits that dividend income can bring to investment portfolios.

After all, companies worldwide slashed their dividend pay-outs in the second quarter of this year to their lowest level in more than a decade. Expectations for aggregate dividend pay-outs over the next 12 months have dropped recently by about 15% (see chart 1).


Chart 1: MSCI AC World Index, Bloomberg 12M forward dividend per share estimates


Past performance is not a guide to future results.

Source: MSCI AC World Index, Bloomberg, September 2020

But investors should look beyond alarmist headlines and focus on the facts: companies still paid shareholders $382 billion1 in dividends in the second quarter despite a global economic shutdown. It underlines how the vast majority of stocks continued to pay dividends even during a crisis.

The worst-hit markets for cutbacks were those where a dividend culture is most deeply embedded: Europe and the UK. On average, European firms allocate a higher percentage of their free cash flows to dividends than anywhere else in the world2. It follows, then, that cuts were correspondingly higher.

But analysis of the data reveals that banks alone accounted for more than 40% of dividend cutbacks across Europe in the second quarter3. That was after the European Central Bank ordered banks to freeze pay-outs to preserve capital and support businesses and households during the pandemic.

Subsequently the UK’s top financial regulator – the Prudential Regulation Authority – also applied pressure on banks under its purview to follow suit. Each of Barclays, Santander, Lloyds, NatWest, Standard Chartered and HSBC has confirmed they will not be paying dividends in 2020.1

But it’s important for investors to distinguish between companies cutting dividends due to cash-flow difficulties, and those compelled to do so by regulators and governments. Many of the latter were in a position to continue paying dividends, and will surely resume when permitted.

At the same time, the pandemic has not impacted all companies equally. Firms operating in sectors such as travel, leisure and construction have been among the hardest hit. Yet others are benefitting from changes in work and consumption patterns in areas such as cloud computing and online services.

Investors can actively reduce their direct exposure to the virus’ impact and to stocks where they anticipate unwanted tail risks.

Inevitably it means some companies will be better placed to sustain their earnings and dividend payments than others. When it comes to dividend investing, investors can actively reduce their direct exposure to the virus’ impact and to stocks where they anticipate unwanted tail risks. At the same time, they can target companies with the strongest balance sheets and competitive positioning to sustain their pay-outs.

Investors can actively reduce their direct exposure to the virus’ impact and to stocks where they anticipate unwanted tail risks.

In many cases, payment of a dividend can act a good proxy for the quality of a company’s management and governance. Research from financial services firm Jefferies shows how quality stocks tend to avoid the worst of the dividend cuts, with a strong correlation between board independence and dividend pay-out.2

In the US, where board independence is deeply ingrained, companies with less than 60% of independent board members average a 17% dividend pay-out, versus a 33% pay-out for firms with more than 90% of independent board members, the research finds.

Global context

Another critical factor substantiating the sustainability of dividend income is the size and diversity of the global equity universe. We maintain a buy-list of 1,100 companies globally at Aberdeen Standard Investments, including dividend-paying stocks. We believe this provides us with a sufficient pipeline from which to choose.

Moreover, while dividends from companies on Europe’s EuroSTOXX and the UK’s FTSE100 indices are forecast to be cut by over 30% in 2020, for Japan’s Topix500 Index the figure was 8% and for the S&P500 it is projected to be flat, according to Bloomberg’s dividend projections as at the end of June.

On the upside, more than 30% of companies in the UK, Europe and Japan are expected to raise dividends in 2020, while in the US that figure is projected to be more than 60% (see chart 2).


Chart 2: Companies projected to raise dividends


Source: SG Cross Asset Research/Equity Quant, Bloomberg, 6 July 2020

Data also shows that the market with the most sustainable dividends is the US. Just 30% of US firms cut dividends during the 2008 financial crisis, notes research from Jefferies. It has been a similar story during the Covid-19 pandemic, with US dividends the most resilient in the world so far.

Jefferies attributes this to the fact that US companies spend more on buying back their own shares – another way to return capital to shareholders – than any other market. During periods of stress, US firms have a history of suspending buybacks rather than dividend payments.

In Asia, meanwhile, almost 90% of companies pay dividends now, according to data from Jefferies and Factset. Moreover, they also have far lower levels of leverage on average than elsewhere. This is a region that already accounts for more than 50% of global economic growth. With low net gearing and consistently high free-cash flow, we expect companies in Asia to drive continued global growth in dividend pay-outs.

Chart 3 below highlights the trend of global dividend growth over the past quarter century.


Chart 3: Global dividend growth over the past 25 years



Estimates are not guaranteed and actual events or results may differ materially.
Source: Bloomberg, MSCI AC World Index, May 2020

Investor opportunity?

More than just sustainability, investors should also be mindful of the opportunity that the global universe of dividend-paying stocks presents. Due to the sharp compression in bond yields, equities have offered a higher average yield than bonds since 2011 (see chart 4). We expect no let-up in this trend given the enormous pool of low and negatively yielding bonds, which now stands $15 trillion globally.


Chart 4: Equities have offered higher average yields than bonds since 2011


Past performance is not a guide to future results
Source: SG Cross Asset Research/Equity Quant, Bloomberg, September 2020


Ageing global demographics also point to continued strong demand for income as people increasingly look to save for their retirement. This growing pool of capital seeking income provides a strong incentive for companies to continue paying dividends.

So despite all the headlines about cutbacks in dividend pay-outs, investors should take heart that there remains a broad base of dividend-paying companies to choose from, particularly when they search on a diversified global basis.

For more information on dividend investing, visit aberdeenaod.com and aberdeenagd.com.

1 Financial Times, “Global dividends suffer worst quarterly fall since 2009,” August 23, 2020.

2 Microstrategy – Dividend Playbook 2020, Jefferies

3 The Global Income Investor, SG Cross Asset Research/Equity Quant/Bloomberg

Bloomberg data used for illustrative purposes only. No assumptions regarding future performance should be made.



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