Dividends: Get off the Couch, Go Global

 

April 12, 2019 [DIVIDENDS, GLOBAL ALLOCATION, INCOME]
Michael Ordonez

 

 


Look outside the U.S. to capture all the benefits of dividend strategies.

Time tested
Investing in dividend-paying stocks may seem like a dog-eared page from your grandparents’ playbook, but amid a slowing global economy and increased market volatility, it’s sensible to revisit a strategy that has proven to capture growth even in challenging times.

Dividends can help ease investor woes during market downturns by providing consistent income (a bird in the hand, after all). And let’s not forget that other age-old axiom about the power of compounding—dividends are a real driver of total return. Time doesn’t lie: historically, dividends have accounted for over 50% of the return of the S&P 500.1

If that sounds significant, consider that equity dividends outside the U.S. have done better, accounting for 70% of the total return of the MSCI ACWI ex-US Index since its inception.2 Tax treatment of dividends can be more favorable in certain countries abroad. Also, many companies ex-U.S. believe in giving capital back to shareholders, so the dividend-paying culture abroad has been quite strong. Average dividend yields clearly tell the story—more than double the U.S. in some regions (see Chart 1).

 

CHART 1: GLOBAL DIVIDEND YIELDS BY COUNTRY (2019 ESTIMATES AS OF 12/31/18)

 

Generous but sturdy
So, it makes sense to consider a global dividend strategy that can invest in all geographies versus a U.S. dividend fund or a single dividend-paying stock. Beyond geography itself, going global for income helps diversify a portfolio as market sectors with attractive dividend yields are more varied relative to the U.S. (see Chart 2).

It’s about more than just income. Companies committed to paying robust dividends often have strong balance sheets to match, which helps stabilize their stock prices through bouts of volatility. Because they tend to be disciplined stewards of capital, dividend payers are more likely to provide a healthy return on investment and to increase dividends over time. But a warning: don’t just go chasing the highest yields. A fundamental, bottom-up analysis can identify those companies with not only the willingness to pay a healthy dividend but the ability to sustain it and grow it.

 

CHART 2: GLOBAL DIVIDEND YIELDS BY SECTOR (2019 ESTIMATES AS OF 12/31/18)

Source: Bloomberg (MSCI Indices). Real Estate is excluded due to incomplete data.

The MSCI country indices are free float-adjusted market capitalization indices that are designed to measure equity market performance in that specific country in U.S. dollars. The MSCI EM (Emerging Markets) Latin America Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of emerging markets in Latin America. The index consists of the following 5 emerging market country indices: Brazil, Chile, Colombia, Mexico, and Peru. The MSCI Nordic Countries Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the Nordic region. The index consists of the following 4 developed market country indices: Denmark, Finland, Norway, Sweden. The MSCI Europe ex-U.K. Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the developed markets in Europe. The MSCI Europe ex-U.K. Index consists of the following 15 developed market country indices: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Israel, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland.

 

Get paid to wait
International indices’ returns have not been favorable relative to the S&P for years. However, investing a global dividend strategy with the flexibility to be selective in its investments can be an effective way to pinpoint opportunities that do exist overseas, all while collecting (or better yet—reinvesting) that welcome bonus of dividend income. After all, there’s nothing wrong with getting paid to wait for more attractive market conditions. How confident are we that the next 10 years in U.S. markets look the same as the last decade?

It has been said that “there’s no place like home,” but a homespun strategy of dividend investing paired with a global perspective can take advantage of a world of opportunities.

 

1. U.S. data from 1871–1990 is from “An Analysis of the S&P 500 Index and Cowles’s Extensions: Price Indexes and Stock Returns, 1870–1999”, Jack W. Wilson and Charles P. Jones, Journal of Business, 2002, vol. 75 no 3. Data after 1990 is from MSCI indices.

2 Moody’s.
Important Information
Before investing, carefully consider the Fund’s investment goals, risks, charges, and expenses. For a prospectus or summary prospectus containing this and other information, contact your financial advisor or visit thornburg.com. Read them carefully before investing.

The performance data quoted represents past performance; it does not guarantee future results.

Investments carry risks, including possible loss of principal.

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

Dividend yield is one component of performance and should not be the only consideration for investment.

Please see our glossary for a definition of terms.

The performance of any index is not indicative of the performance of any particular investment. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. Investors may not make direct investments into any index.

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