Desirable Dividends

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Desirable Dividends As the world’s population ages, finding a sustainable income has never been more critical for some investors. Fortunately this coincides with companies increasingly recognizing the appeal of a growing and sustainable dividend. In the following article, Heather Farmbrough of Citywire interviews Ben Lofthouse, Co-Manager of the Janus Henderson Global Equity Income Fund, on the benefits of taking a global approach to dividend investing. The need for investors to find sustainable sources of income has arguably never been greater. The world’s population is becoming increasingly old: according to the United Nations World Population Ageing Report, by 2050, for the first time ever, there will be more people over the age of 60 than young people 10 to 24 years of age. For investors seeking income, while protecting or potentially growing their capital, it is a challenging time. Rates of return on cash and fixed interest are close to their lowest ever levels and investors remain nervous in the face of global political and economic uncertainty. Although inflation in headline terms is low, it is rising, as Ben Lofthouse, Global Equity Income Portfolio Manager, observes, and this will cut into peoples’ real investment incomes. “Many people have been worried about equity markets since the global financial crisis but the biggest crime has been not being invested,” Lofthouse says. “We’ve all done it – we’ve all waited for the dip to buy – and in the current environment, that’s very harmful for investors who want income, because we’re not being paid to wait. So, the problem is, how do you approach finding income?”

Knowing where to look “The good news,” he continues, “is that firms offering a good level of dividend yield, such as financial services, are on a low P/E multiple1 with a good level of income and cash generation. The market is being quite rational, which isn’t always the case. One of the worst things for equity income investors is when everything is expensive.”

Taking a global view means having the ability to avoid those corners of the world where local conditions are less favorable – for instance, some utilities in the UK are currently less attractive than elsewhere due to political pressure to keep price increases down. Lofthouse is less concerned with making predictions about companies or economies than ensuring that a company has a safety margin if things do not go as planned. He looks at factors like balance sheet strength, dividend payout ratio – the percentage of net income that is distributed to shareholders in the form of dividends – and low volatility of earnings. He adds: “Dividend growth tends to be more stable than earnings growth, so at times dividends may not grow as much, but on the flip side, at more difficult times, they likely won’t fall as much as earnings.” The February 2017 Janus Henderson Global Dividend Index (JHGDI) illustrates the validity of a global approach in other ways. While global dividend growth in 2016 was disappointing, particularly in North America and the UK, there was nevertheless strong dividend growth in Europe and the Asia Pacific region. The JHGDI is a long-term study into global dividend trends by measuring the progress that the 1,200 largest global firms by market capitalization are making in paying investors an income on their capital. The index helps to assess future income flows and corporate dividend policies as well as identify where there have been geographical changes. For example, in France, which is the biggest dividend payer in continental Europe, the banks have been returning to health; they increased their payouts by 53% compared with 2015, equivalent to an extra U.S. $2.8 billion.

“Dividend growth is very good on a stock-by-stock basis; last year, mining firms struggled to grow their dividends but this was offset by financial services, technology and housebuilders lifting their dividends.”

Why it pays to pay dividends

Lofthouse and his colleagues on Janus Henderson’s Global Equity Income Team concentrate on identifying companies around the world whose cash flow and retained earnings will allow it to go on paying an income to investors.

More and more companies are recognizing that a strong, sustainable and growing dividend policy helps to attract long-term investors who will form a stable shareholder base. In 2016, the world’s listed companies paid out over U.S. $1.15 trillion in dividends, according to JHGDI.

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Desirable Dividends Figure 1: Higher dividend-paying companies have historically outperformed MSCI World High Dividend Yield Index

Figure 2: Estimated versus realized dividend yield Forecast yield

MSCI World Index

600

20

Realized yield Realized yield broadly in line with market forecasts

500

Realized yield lower than market forecasts

300

%

Index (rebased)

15 400 10

200 5

Reinvested dividends are responsible for a considerable part of the performance that comes from long-term equity investment. Research indicates a positive correlation between companies that can offer investors a rising dividend income stream and long-term capital performance. These companies may not have the highest yielding shares, but their underlying growth prospects and cash-flow can make them a more reliable proposition for investors than higher yielding companies whose dividends are less sustainable. Being committed to financing a dividend on a continued basis means that companies have to be well-financed and capable of producing a sustained cash flow. There is also evidence that it makes them a little more disciplined when it comes to decision making.

15%-20%

10%-15%

9%-10%

8%-9%

Source: Thomson Reuters Datastream, 5/31/97 to 5/31/17. Past performance is not a guide to future performance.

7%-8%

2017

6%-7%

2013

5%-6%

2009

4%-5%

2005

3%-4%

2001

2%-3%

0 1997

1%-2%

0

<1%

100

Dividend yield level Source: Société Générale Cross Asset Research, as at March 2017. Note: Yield and forecasts relate to the period 1995 to 31 March 2017.

Companies that are yielding less than 5% to 6% on average have historically been better placed to pay dividends to shareholders over several years than those that yield 5% to 6%, and where dividend payments tend to be less sustainable. Those companies that offer a reasonable and regular yield over the long term are also likely to perform better than those that cut their dividends.

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