- Companies that consistently grow their dividends tend to be well-established, high-quality companies with solid balance sheets and relative earnings resilience
- Historically, over the long run, companies that have consistently grown their dividends have delivered strong risk-adjusted returns, well in excess of broader global equities
- Dividend-growing companies have tended to be more resilient in more challenging market conditions, reflected in relatively lower drawdowns on average
- Given dividends’ scope to be increased over time, as well as the potential for capital appreciation, dividend-growing companies can provide a degree of inflation protection
- Today’s economic backdrop (of high inflation, higher interest rates and weaker growth) may be well-suited to a dividend growth-focused approach in global equities
In this article, we make the case that a dividend investing strategy that focuses on companies that consistently grow their dividends works well in the context of global equities. We also make the case for why such a dividend strategy can offer a powerful combination of growth and resilience, which may be particularly well suited to the prevailing global economic environment of slowing growth, elevated inflation and higher interest rates.
Strong long-term returns
There is substantial evidence from across different equity markets showing that dividend-orientated investing strategies outperform the broader market over the long run. Chart 1 (below) shows that over the last 20 years, companies that have initiated or consistently grown their dividends (Dividend Growers & Initiators) have comfortably outperformed the broader global index. Dividend Growers & Initiators have also outperformed companies that have paid dividends but without growing them (No Change Dividend Payers) and companies that don’t pay a dividend (Non-Dividend Payers).
Chart 1. Global equity returns by dividend policy 2003–2022
Source: abrdn, Factset. Data from 31/12/2002 to 31/12/2022. Historical compounded returns (%) of dividend categories and standard deviation (%) since 1993. The investment universe is the MSCI All Country World Index, using annual income class returns. Dividend policy constituents are calculated on a rolling 12-month basis and are rebalanced annually. Category returns are calculated on a monthly basis. Shown for illustrative purposes only. Index returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and cannot be invested in directly. For illustrative purposes only. Past performance is not indicative of future returns. Dividend policy categorization explanation: The ‘Income Growers & Initiators’ category represents performance for companies which either increased or initiated dividend distributions. The ‘No Change Dividend Payers' category represents performance for companies which pay a dividend but have neither increased nor decreased their dividend distribution. The ‘Dividend Cutters & Eliminators' category represents performance for companies which have either cut or eliminated their dividend distribution.
Further indicating the importance of dividend directionality, Chart 1 (above) shows a marked underperformance in the returns of companies that have cut or eliminated their dividend payments (Dividend Cutters & Eliminators).
Lower volatility potentialThe other main attraction of dividend investing comes from the risk perspective – namely lower volatility, which has contributed to historically attractive risk-adjusted returns over the long run.
Chart 2 (below) shows that within global equities, the annual return volatility (lighter blue bars) of Dividend Growers and Initiators is distinctly lower than that of Non-Dividend Payers and Dividend Cutters & Eliminators. Further, relative to broader global equities (the MSCI ACWI Index), the return volatility of Dividend Growers & Initiators has also been lower, contributing to better risk-adjusted returns.
Chart 2. Risk and return of global stocks by dividend policy (2003–2022)
Source: abrdn, Factset. Data from 31/12/2002 to 31/12/2022. Historical compounded returns (%) of dividend categories and standard deviation (%) since 1993. The investment universe is the MSCI All Country World Index, using annual income class returns. Dividend policy constituents are calculated on a rolling 12-month basis and are rebalanced annually. Category returns are calculated on a monthly basis. Shown for illustrative purposes only. Index returns do not reflect any management fees, transaction costs or expenses. Indices are unmanaged and cannot be invested in directly. For illustrative purposes only. Past performance is not indicative of future returns. For dividend policy categorization explanation please see source wording under Chart 1.
The Sharpe Ratio takes both risk and returns into account in a single measure. As shown in Chart 3 (below), the strong risk-adjusted returns of the Dividend Growers & Initiators segment is more clearly visible.
Chart 3. Sharpe ratio of global stocks by dividend policy (2003–2022)
Sources of risk advantage
The lower volatility of dividend strategies, which has given them a defensive reputation, can be linked to certain qualities that are often found to be prevalent in the typical profiles of companies that pay dividends and grow dividends. Indeed, the ability to pay dividends regularly, and the ability to grow dividends, has widely been seen in itself as an indicator of reliable earnings quality and growth.
The risk advantage of dividend strategies can also be linked to behavioural investing. In particular, in more challenging economic and market conditions, equity investors have tended to prefer the increased certainty of dividend payments (which are inherently less risky and volatile than capital gains), as well as the up-front cashflows which can provide a valuable cushion against potential capital weakness.
Behaviourally, on the companies’ side , there is usually strong aversion to cutting dividends because of the potential negative signaling effects of doing so. This is something that also helps to explain the considerably lower year-to-year volatility in dividends payments compared to corporate profits.
Historically lower drawdowns in down markets
The above mix of behavioral factors is helpful in explaining the frequently observed outperformance of dividend strategies in down-markets.
Indeed, in the case of global equities, as shown in Chart 4 (below), the drawdown in down-markets of the Dividend Initiators & Growers category was clearly lower compared to broader global equities over the last 20 years. Chart 4 (below) does also show that dividend-growers captured a little less of the upside compared to broader global equities during up-markets. However, the lower drawdowns of this segment easily trump the lower upside capture, resulting in substantial outperformance over the long run.
Chart 4. Global equity returns in up and down-markets 2003–2022
Inflation-protected income potential
Income from equity dividends has some specific well-known advantages compared to income from bonds. Firstly, albeit with more risk, equities typically offer greater upside potential from price appreciation. Secondly, unlike most bonds and other investments that pay set interest rates, companies have the ability to increase their dividend payments over time. As such, companies that increase dividends in inflationary environments can potentially provide inflation-hedged income opportunities.
The potential benefits of a global approach
Although dividend strategies have an understandable defensive reputation, the abundance of dividends across key sectors means there is also ample scope for diversification. As shown in Chart 5 (below), the global equities market (as represented by the MSCI ACWI Index) is especially well diversified across sectors and more so than some regional markets, which we think supports the case for a global approach to dividend investing.
Chart 5. Global equities sector diversity
Source: MSCI AC World Index factsheet, March 2023
Dividend investing today
Today’s global economic environment is for the most part characterized by high inflation and an unprecedented pace of interest rate rises aimed at addressing this. In turn, this is leading to markedly slower economic growth and an elevated risk of recession in many countries. In this context, the surge in the ‘risk-free interest rate’ implies reduced investor preference for companies offering uncertain future growth, and an increased preference for solid earners, high dividend-payers, and dividend-growers.
In the current environment of significantly higher interest rates and increased credit risk, balance sheet strength – another of the typical features of many dividend-paying and dividend-growing companies – gains added importance. Following on from this, it is our view that when it comes to executing a dividend-focused investment strategy, an active rather than a passive approach is better suited to identifying the totality of specific risks and opportunities.
Putting everything together
Global companies that grow their dividends tend to be well-established, high-quality companies with solid balance sheets that also benefit from proven earnings and cash-flow resilience. Historically, over long periods, these types of companies have delivered good returns combined with lower volatility, resulting in strong risk-adjusted returns well in excess of broader global equities.
From a risk perspective, the defensive reputation of dividend strategies appears linked to increased investor preference for the typical profile of dividend-paying and dividend-growing companies in more challenging economic periods. In addition, dividend payments tend to be inherently more stable and certain, providing valuable downside protection that is also reflected in significantly lower drawdowns in down-market periods.
In summary, we believe the long-term case for dividend growth-focused investing in global equities is empirically well-grounded. Furthermore, such an approach may appeal especially to investors looking for global equity market exposure, but with a greater degree of built-in resilience. However, from a more tactical perspective too, we believe that today’s economic backdrop (of high inflation, higher interest rates and weaker growth) appears well-suited to a dividend growth-focused strategy in global equities.
Dividends are not guaranteed and a company's future ability to pay dividends may be limited.
Foreign securities are more volatile, harder to price and less liquid than US securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.