Return of the dividend: Growth might be muted in the UK, but foreign firms are paying out

Watershed moment: Apple is divvying out to shareholders (Source: Getty)

The UK has a very good track record when it comes to companies paying dividends. Businesses understand the importance of looking after shareholders, who in turn understand the value of either reinvesting those dividends (which account for two-thirds of total returns over the very long term) or using them to supplement an income.

So it’s perhaps no surprise that UK equity income funds, which specifically look to invest in companies paying a dividend, are also very popular. The UK equity income sector has been the bestselling sector in six of the past 12 months – a pattern we see year in, year out, with around 10 per cent of all fund investments in the UK held in this type of fund.
In the low-yield environment we have been experiencing since the global financial crisis forced the Bank of England to cut interest rates to record lows, and bond yields went down with them, the search for income has led more and more investors to seek out this type of investment.
However, with this popularity has come a couple of possible issues. First, if you own more than one of these funds, it is possible that you are “doubling up” as they could well be invested in the same companies. Second, you are reliant on these companies continuing to pay a dividend and not cut or stop it. We’ve seen this recently with both Tesco and Glencore, for example.
Despite our strong economy, dividend growth in the UK is quite muted at the moment. This is due in part to the fact that our stock market is unusually dominated by companies with particularly high exposure to oil, gas and mining. The dividend cover for the FTSE 350 (which shows whether or not earnings will allow the company to maintain dividends in the near future) has fallen to a six-year low.

THE DIVERSIFICATION KEY

The answer to these issues is diversification. Instead of just looking at UK companies, you could look further afield. As markets have increasingly valued dividends, we’ve also seen companies from many other countries start to pay them, and the sources are shifting and diversifying nicely.
For example, until recently, US companies have seen dividends as a sign of weakness – their payment means the company is not growing any more. For such an entrepreneurial society, you can see why this might be seen as a negative. However, when you look at the results of the US companies that have consistently paid a growing dividend compared with the rest of the market, it is very hard to see why this should still be the view.
The S&P 500 Dividend Aristocrats index, which is made up of companies that have increased their dividend payments every year for 25 years or more, has outperformed the overall market by 2.88 per cent a year over the past decade. Of these companies, there are 16 that have managed to grow their dividends for 50 years or more, among them Coca Cola and Johnson & Johnson.

BIG NAMES JOINING THE PARTY

With the likes of Apple starting to pay a dividend, it seems that we may now be at a turning point. Indeed, according to Henderson Global Investors, US dividends have increased by 10 per cent year-on-year, with strong growth across almost all sectors of the economy. Over the past six years, dividend payments have almost doubled.
Japan is another area that is becoming increasingly interesting. At 22 per cent, Japanese firms have one of the fastest annual dividend growth rates in the world. Elsewhere in Asia the story is similar, with Taiwan and South Korea leading the way, albeit with the latter starting from a low base.
On aggregate, global dividends have risen more than 56 per cent since 2009. Henderson expects them to have increased by around 9.5 per cent by the end of this year and a further 4.1 per cent next year. So for fund managers looking around the globe, there are still plenty of good opportunities.
Funds of this ilk which are paying an income in excess of 3 per cent, and which are, in my view, worthy of consideration, include: Artemis Global Income, Legg Mason IF ClearBridge Global Equity Income, M&G Global Dividend, and Newton Global Income.
If you are looking for a more regional or country specific fund, then BlackRock Continental European Income and Schroder Asian Income warrant a look.
And if you are willing to take on more risk, Charlemagne Magna Emerging Markets Dividend is also very good.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles