InvestmentsOct 14 2020

Solving the global dividend puzzle

  • Explain why dividends have been falling around the world
  • Describe a capital intensive business
  • Identify areas of growth
  • Explain why dividends have been falling around the world
  • Describe a capital intensive business
  • Identify areas of growth
pfs-logo
cisi-logo
CPD
Approx.30min
pfs-logo
cisi-logo
CPD
Approx.30min
twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by
pfs-logo
cisi-logo
CPD
Approx.30min
Solving the global dividend puzzle

But in the long-term, if you find these companies, it is likely to pay off in far higher levels of income, together with strong capital appreciation.

For every company facing a prolonged period of trouble, there is another for which COVID-19 will ultimately prove transitory. The best companies with relevant business models will undoubtedly see earnings and dividends bounce back.

Well-run insurance companies, for instance, will continue to play a vital role in protecting policyholders against disasters – and the value of that insurance may well be higher in a post-pandemic world. Innovative manufacturing companies, with products that genuinely enhance the efficiency of their customers, will see their earnings bounce back too.

Delivery companies will find their services in ever-greater demand. Restaurants which are happy to deliver as well as host diners will surely thrive.

Even in the property sector, dividend investors can anticipate that well-invested residential assets, in a post-virus world of Zooming and flexible home-working, will generate solid rental income.

The challenge is to make sure that you, as an investor, exercise the discipline to invest in these businesses of the future, rather than clinging to the high-yielders of the past. Even if doing so means moderating dividend income in the short term.

The question for dividend investors to ask therefore is not “What companies can I buy to plug this year’s income gap?” but rather “What companies do I believe have a strong future once this crisis has passed?”

Our mantra is “long-term income, not short-term yield”. The yields on the funds we manage are by no means the highest in the income universe, because we are longstanding advocates of sacrificing short-term yield in the pursuit of better long-term income and capital growth. 

We have shunned many of the sectors and companies that are now struggling profoundly. This approach has delivered stronger total returns than most short-term yield-focused funds, as well as providing an income which has risen over time.

Be demanding of the businesses you invest in. If you’re investing for long-term income, set a high bar that only accepts genuine growth businesses.

Companies that can grow their earnings to support higher dividends in five or ten years’ time are far more rewarding investments than short-term ‘yield plays’. That is why it is best to avoid the old economy , ex-growth companies that have propped up the market’s yield for a long time. 

Avoiding the dividend duds 

Companies with dividend resilience are usually those that aren’t capital-intensive, or highly cyclical.

Capital intensive businesses are those, such as miners, which need to spend lots of cash to keep growing, for example, on new mining rights, and so may have less cash for dividends. 

PAGE 3 OF 4