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Look beyond the UK for dividend income
Global dividend income is there for the taking, but which markets offer the best returns?
UK dividends may have hit a record high of £22.6 billion in the second quarter – 18.4% up on the previous year – but two-thirds of this came from just 15 FTSE 100 members, with the next 85 contributing another 27%.
Looking further afield
While the UK is rightly considered the most mature dividend market in the world, UK investors often fail to appreciate just how much regular income payments contribute to the total equity return elsewhere in the world, said Peter Perkins of global investment analyst the Macro Research Board (MRB).
‘Dividends have accounted for the majority of global equity returns since 1970,’ Perkins said. ‘Since 1970, global stock prices have risen by a tepid 1.4% per year in real terms, while the total return, including re-invested dividends, has risen by a much greater 4.5%.
‘In general, stock prices account for the bulk of equity total returns over short investment horizons, but dividends account for the majority over long horizons. This underscores that dividend strategies should be based on longer-term investment horizons.’
Bombed-out European value offers a logical starting place for a global equity income investor, with a yield of 4.6% versus the FTSE All-Share's 4.11%. Perkins added that relative dividends and cashflow stand at the lower end of their range, suggesting they could rise back to their historical average. Weighed against this is the threat of a deep recession that puts share prices and dividends at risk.
‘The high yields of the periphery are misleading, as dividends will be under severe pressure for some time,’ he said. ‘Very high yields in the Spanish and Portuguese telecom sector highlight that current dividends are unsustainable.’
Germany offers a relatively low yield at 3.8% but relatively well supported fundamentals. The payout ratio versus cashflow is currently elevated but any earnings recovery next year would correct this.
‘We expect German real dividends to increase in line with the global average (and above the developed market average) over the next several years, which should enable the market to outperform in total return terms.’
Norway (5% yield) and Sweden (3.9% yield) offer relative stability, although with a lower rate of growth.
The complicating factor in the case of Norway is the country’s dependence on oil extraction, although if you believe the oil price has found a floor payouts remain well-covered.
‘The caveat is that the Swedish market is highly cyclical, so the benefits of high yields and rising earnings are punctuated by periodic sharp downturns,’ Perkins said.
‘Brazil’s 5.9% yield is the highest among the major emerging markets,’ noted Perkins, thanks to the levels of cash being thrown off by the resource sector, which comprises around a fifth of total market cap.
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