Equity income managers appear somewhat divided over the outlook for dividend payouts this year.
While global equity income has long been a reliable source of income for many investors, there are signs dividend growth is slowing.
The Henderson Global Dividend Index, published in November 2016, reveals global dividends declined 4 per cent on a headline basis to $281.7bn in the third quarter - $11.9bn lower than a year earlier.
This saw the Global Dividend Index (the statistical measure of change of the index) fall to 159.4, back to a level not seen since mid-2014.
This means global dividends for the full-year 2016 inched ahead by just 0.1 per cent to reach $1.2tn.
The slowdown is largely attributed to a decline in payouts from US companies, where there were lower special dividends but also to a stronger dollar which translated into less favourable exchange rates.
Henderson points out European dividend growth is not enough to offset the drop off in payouts from the US.
Figure 1: Net retail sales of the IA Global Equity Income sector
Source: Investment Association
Andrew Wheatley-Hubbard, portfolio manager of the BlackRock Global Equity Income fund, believes the outlook for dividends comes down to sustainability.
“The low rates of most of the last decade have made dividend stocks seem more attractive, and encouraged companies to increase the portion of their profit they pay as a dividend – their payout ratio,” he says.
“When considering dividends, we believe that the most important factor is how sustainable it is – how sure are you that it will still be paid in three, four or five years’ time?
“Not all dividends are created equal and we anticipate 2017 being a year when we start to see greater disparity between sustainable and unsustainable dividend paying stocks.”
The reason for this is some of the highest yielding sectors, such as utilities, have had to borrow in order to fund their dividend payments.
“In fact, over the last five years the S&P Utilities sector in aggregate hasn’t brought in enough cash to cover its capex requirements, let alone pay dividends,” Mr Wheatley-Hubbard points out.
He cautions: “In a world of rising rates, debt will become more expensive and the dividend is at risk of a cut for those companies that have borrowed to return cash to shareholders.”
But Andrew Jones, global equity income fund manager at Henderson Global Investors, is far more positive on the outlook for dividend payments this year on the basis corporate profitability is likely to improve.
“Payout ratios for the MSCI World [index] are broadly in line with historical levels and therefore increases in earnings should lead to rises in dividends,” he suggests.