A new chapter in dividend investing

For the past decade equities have become increasingly important as a source of income. Dividends have risen in value as an alternative to income from bonds, the latter no longer protecting against inflation as many risk-free sovereign yields have deteriorated. Corporates have in some cases made dividend-paying a part of their financial strategy to keep investors onboard.

But after some years of record pay-outs, questions are being asked now about the ability for dividends to keep growing.

Global dividend payments reached a new high in the second quarter of 2019, even against the headwinds of slower economic growth. Corporates paid out $513.8 billion, according to Janus Henderson. Yet commentators pointed out this figure was a rise of “just” 1.1% in headline terms from last year.

Underlying dividend growth – once ‘special’, usually one-off and quite large dividends were paid out – was a more encouraging 4.6%, but this rate of increase was still the slowest for more than two years.

Speaking to equity income asset managers in recent weeks, the Lens has found two reasons not to worry for dividend income, however.

First, it’s a little like when people worry about falling Chinese GDP, sometimes forgetting that China is still printing GDP numbers way higher than developed markets can attain.   Dividends have been growing so quickly over the last two years that the slowdown isn’t necessarily a cause for concern. The underlying growth rate this year is in line with the long-run average. Dividends paid out in emerging markets still look healthy. Indonesia made a record pay-out in the second quarter and Russian and Colombian dividends saw fast growth.

But what is particularly encouraging is the second factor: Japan.

Japan registered the best performance in terms of dividend payments from developed countries. This looks set to be the start of a strong trend that could start a new chapter in equity income, because the underlying reason for higher dividends from Japanese companies is structural.

It is that Japanese businesses have modernised their corporate governance and shareholder relations over recent years – something that will pay dividends for everyone.