Globally, quoted companies paid out a record $1trn (£589.3bn) in dividends last year. With annualised dividend growth of 9.4 per cent since the 2009 market lows, there is plenty more to come.
Companies increasingly recognise the benefits of attracting investors by being able to demonstrate a strong and growing dividend policy. This is well established in Europe and the US but the dividend culture is now providing increased opportunities in regions such as Asia-Pacific and selected emerging markets.
Studies indicate that dividends generate a significant proportion of the total returns from equities over time. The combination of reinvested income with potential capital growth has led to long-term outperformance of higher-dividend paying companies compared to the wider equity market.
Reasons for this outperformance include a focus on growing cashflow, which is required to sustain dividends and which also acts as a useful indicator of the underlying health of the business.
Cashflow needs to be good in order for dividends to be paid over time, which reduces the risk of business failure and misrepresentation of earnings. In addition, higher yielding shares by their nature tend to be out of favour, thus offering revaluation opportunities.
As more companies globally pay dividends, the potential to diversify increases. Some markets suffer from dividend concentration and, as a result, equity income strategies focused on single countries may become overly reliant on a low number of high-yielding companies that dominate the market. A global remit also maximises the opportunities at a sector level; for example, many high-yielding technology companies can be accessed through investing in the US or Asia, but not Europe.
History shows that dividends from the highest-yielding stocks are often unsustainable, with an estimated yield above 5 per cent less likely to be realised. A successful strategy therefore looks to balance investments in businesses that offer an attractive yield with opportunities for dividend growth, while also ensuring cashflows remain sustainable with good dividend coverage.
The level of dividends paid has been growing and this is forecast to rise further as the health of corporates continues to improve. At a stock level it is possible to find companies in all regions expected to raise their dividends by roughly 7-8 per cent, so there are lots of opportunities to add value for investors.
Graham Kitchen is head of equities at Henderson Global Investors
