Dividend-paying companies look attractive, particularly those that increase their payouts from year to year.
In the current climate of financial repression, few liquid securities offer the potential for inflation-beating income growth.
Dividend-paying stocks are becoming more attractive to investors, but they should be asking themselves at what expense the dividends come.
The UK has a lengthy track record of increasing dividends, and some UK firms have indulged in these half yearly or annual shareholder rewards for the past 40 years or more. However, it is not just a domestic phenomenon.
Paying dividends is well established in Europe and Latin America, where companies understand shareholders’ demands for recompense. Asian firms are also increasingly embracing the idea in order to attract investment funds.
Even businesses in emerging markets are progressively using more of their earnings to return value to investors.
While the principle of paying cash to shareholders is important, the process should not be carried out unquestioningly.
The recessionary backdrop across Europe, slowing growth in Asia and emerging markets, and the mixed recovery of the UK and US economies is a difficult environment for many companies.
On top of this, some sectors are suffering more than others. Oil companies, which have a tradition of paying dividends, are under pressure following the sharp drop in the price of Brent crude.
With a difficult investing backdrop and fewer opportunities to grow their top line, many firms are reducing the selling prices of their goods and services in order to maintain profits. This in turn directly influences their ability to pay dividends, not to mention the risk to long-term growth.
Companies are choosing to cut research and development spending and sacrifice long-term business budgets rather than fail to increase dividend payments. This can have devastating effects on long-term revenues and thus put future returns at risk.
Fortunately, despite the current global economic environment, there are some firms that are achieving both top-line and dividend growth.
These businesses are not confined to one region or sector, but are spread across the globe. They offer – for those willing to do their homework – the opportunity to gain exposure to solid, profitable enterprises.
Mike Turner is head of multi-asset at Aberdeen Asset Management
