The Federal Reserve’s September meeting confirmed that US rates would be on hold at near-zero levels for the time being. And even when the Fed does begin its rate-hiking cycle, the pace of interest rate rises will be very gradual. Essentially, interest rates will stay lower for longer.
Filtering the global equity markets to focus solely on companies paying a dividend in excess of 3 per cent would see investors looking at around 750 companies. The UK equity market is home to 55 of those – significantly more than Germany, Spain and Italy. However, there are still good reasons to look at Europe for dividends. The eurozone is one of our favourite equity markets on a medium-term horizon, primarily due to its healthy credit conditions, reform story and room for margin expansion. These have already supported impressive earnings growth, which we expect to continue in several countries and sectors.
In Japan, improving corporate governance helps create a strong case for income investing. Equities have lagged other developed markets in terms of return on equity, but flush with cash, the country’s corporates have compelling incentives to start paying out higher dividends in the medium term. One particularly effective measure among the government’s steps to strengthen corporate governance has been the launch of the JPX-Nikkei 400 index in 2014, and its requirements for increased returns for shareholders.
In the US, dividend payout ratios, and therefore yield, have been stable. Earnings momentum is more conservative than for Japan or Europe, thus dividend growth will be moderate. But US companies pay 30 per cent of the world’s dividends, and thus American stocks should not be ignored.
Turning to the emerging markets (EM) – currently an unloved asset class – selected dividend payers can vastly outpace their developed market counterparts. Even better, these stocks are on offer at the moment: the relative valuation of high dividend yielding EM equities is much below those in US and Europe.
Bond proxies are, of course, traditionally a safe bet for dividends. In the MSCI All Country World index (ACWI), utilities and telecommunications are sectors providing yields close to 4 per cent. However, higher-dividend-yielding stocks can be found in many industries, even in more cyclical sectors. Indeed, energy stocks in the ACWI have a yield above 4 per cent, significantly above their 15-year average of 2.7 per cent.
Within European equities, the MSCI Europe index is yielding 3.3 per cent, slightly above its long-term average. Investors should selectively gain exposure to sectors that will provide yield without paying too much for the underlying company. Over time, when investing in equities for income, investors gain far more from an active total return strategy. The 15-year high dividend yield total return of the MSCI Europe index is 123 per cent compared to a 7 per cent loss over the same period for price return.
As the best dividend payers can often be found outside investors’ domestic markets, it’s never been more important to keep a global perspective.
David Stubbs and Nandini Ramakrishnan are global market strategists at JPMorgan Asset Management
