While global stock markets have enjoyed a bounce back from the March lows, it’s feared that the ‘dividend bear market’ will last a lot longer.
The latest Global Dividend Index from Janus Henderson suggests that global dividends could fall by between 15% and 35% on aggregate this year^.
Meanwhile, Schroders analysis of nearly 150 years of data on the US stock market (S&P 500) shows that bear markets for dividends – where dividends fall by at least 20% - are a rarity. In fact, there has only been six in the past 150 years compared to 16 bear markets generally over the same period.
And unfortunately, although dividend bear markets have been less frequent, the painful news for investors seeking attractive dividends is that they have historically lasted much longer than those for total returns (growth and income): 4.8 years compared with 1.5 years, on average. This is because share prices react in advance of economic improvement, whereas dividends don’t pick up until after companies’ financials improve.
While dividends may be scarce, they will not disappear completely – far from it. So there is no need for income investors to abandon the equity markets. Fund managers who are able to discriminate between companies with better prospects will be in a much stronger position to deliver stronger and more sustainable growth in dividends over time.
The outlook for different countries during different periods will also be key. And, as the chart below shows, expectations for dividends this year vary greatly.
Europe is likely to be the worst hit this year, as most European companies pay their dividends in one go – so a dividend cancellation has a disproportionate impact. Within the continent, Janus Henderson expects Swiss dividends to see the smallest impact while France and Spain could have the greatest. And Schroders believes that dividend yields could take a long time to return to last year’s level, as European companies are likely to become more structurally conservative when setting their dividend policies.
George Cooke, manager of Montanaro European Income fund, expects dividends to fall this year, but because this is a consequence of political pressure, is positive about the prospects for dividends to be reinstated. “I expect some companies to make up for cuts in the form of special dividends in the future,” he said. “Government support schemes are helping companies to cut costs without necessarily losing their ability to recover quite rapidly. So we are focusing on this ability for dividends to bounce back and then see sustained growth – companies with strong balance sheets and good medium term structural growth prospects.”
The UK has already experienced a swathe of dividend cuts and, in a recent interview, Dr Niall O’Connor, manager of Brooks Macdonald Defensive Capital fund, said that dividend futures for this year are suggesting around a 2.8% yield. “What I think the market really hasn't fully factored in is how low dividends are forecast to stay,” he said. “Dividend futures are suggesting that the UK equity yield for 2025 will only be 3%, and obviously UK income investors have been used to between 4% and 6%.”
Adrian Gosden, manager of GAM UK Equity Income, says the recent sell-off has opened up some very interesting opportunities, with a view to making good money over a two-year view. He’s concentrating on making calls on management and company ‘DNA’ to determine which dividends will continue to be paid in a consistent and generous way going forward.
Janus Henderson says that while Asian dividends are likely to see limited impact this year as pay outs largely relate to 2019 profits, there could be a greater impact in 2021 when weakened 2020 profits are announced. However, Asian companies tend to hold higher levels of cash, reflecting memories of the Asian crisis and traditionally higher levels of family ownership.
Schroders says this should benefit companies across the region as they rebuild once the crisis starts to resolve and Richard Sennitt, manager of Schroder Asian Income fund, has currently skewed his portfolio more towards developed Asia, with holdings in Hong Kong, Taiwan, Australia, Singapore and South Korea making up around 75%* of the fund.
In the US, share buybacks by companies have been particularly prevalent in recent years. This practice may come under much greater scrutiny from here, with some prominent companies that have returned billions of dollars to shareholders now asking for billions in state aid. But the suspension of share buybacks should enable US companies to better protect dividends.
JPM US Equity Income fund holds dividend aristocrat Johnson & Johnson’s in its top ten**. It also holds Microsoft**, which is still on track to become the world’s largest dividend payer this year – having been the 25th largest 10 years ago. Manager Clare Hart believes the US economy will recover but it will first need time to heal. “Through the volatility we continue to increase quality, focus on high-conviction stocks and take advantage of market dislocations for compelling stock-selection opportunities,” she said.
It’s also expected that Japan will see a smaller impact than the UK or Europe due to a lower starting payout ratio and the fact that balance sheets are very often conservative with a high proportion of companies having no debt at all. The direct economic impact has also been less severe. However, as Japan is more vulnerable to a global downturn, there may be more impact on dividends in 2021.
Launched in July 2016, Baillie Gifford Japanese Income Growth taps into the exciting change in dividend attitudes in Japan: the new corporate governance code, coupled with a large cash pile (around ¥250 trillion) on Japanese balance sheets is a big opportunity for investors. While the headline yield figures may be low by Western standards, there is certainly plenty of room for growth.
Emerging market dividends can be volatile at the best of times. Janus Henderson believes the pandemic may hit Indian companies harder and that depressed oil and commodity prices are sure to limit the ability of Russian companies to pay.
But as the managers of Guinness Emerging Markets Equity Income fund point out, it is a big universe. “A significant number of high quality companies are also looking very good value at the moment,” they said. “China and Asia are likely to emerge faster, as most have used effective measures to control the virus. South Africa has also handled the outbreak well. Brazil’s response is more concerning, and we are monitoring the situation carefully. But our approach remains unchanged: we are focused on companies with both resilient business models, that can withstand tough economic circumstances, and with strong financial positions, i.e. with balance sheets that can carry the company through difficult times.”
^Source: Janus Henderson Global Dividend Index May 2020
*Source: fund factsheet, 30 April 2020
**Source: Fund factsheet, 31 May 2020
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the companies and managers and do not constitute financial advice.