Long-term investors serious about income and growth understand the beauty of dividends - over time, reinvesting dividends can notably enhance your investment returns thanks to the power of compounding.
But many investors may still turn to the UK as their first port of call when investing for income. Historically, the UK has offered rich pickings for income hungry investors, but in recent years income investing has become much more of a global phenomenon as companies in other regions cotton-on to the appeal dividends hold in a low interest rate environment.
The Janus Henderson Global Dividend Index, released every quarter is a useful snapshot of dividends across the globe and offers some telling insights into income investing. The latest report, released this week, is no exception. It shows the pace of global dividend growth has hit an all-time quarterly record of $447.5bn (£347.6bn). Dig deeper, however, and there are some notable regional and industry trends which the savvy investor can’t afford to ignore.
Here are three key takeaways from the latest report:
1. The banks are back
Prior to the financial crisis, banks were seen as the bedrock of global dividends. But as the full wrath of the credit crunch set in, many banks saw their profits plummet and were forced to suspend their dividend payments to shareholders. Back in 2009 out of the 202 companies in the UK, which cut payouts, the bulk came from the banking sector.
In the years following the crisis, banks’ dividends were knocked back by requirements to build up capital levels for stress tests. However, with capital now at levels the regulators are satisfied with, banks are reinvesting surplus cash or returning it to shareholders.
Financial institutions accounted for half of global dividend growth in the quarter, according to the Janus Henderson report, with bank dividends growing nearly 9% year-on-year to $58.4bn. In fact, names like Zurich Insurance group, HSBC, Allianz, BNP Paribas and Commonwealth Bank of Australia are all among the world’s biggest dividend payers this quarter.
Fund manager Nick Mustoe is tapping into this sea change with the Invesco Global Equity Income Fund. Around 30% of this fund is invested in financials with names like US bank JPMorgan, ING Groep (Netherlands) and CaxiaBank (Spain) among the largest holdings.
Watch our video interview with Nick Mustoe:
2. The US rising
After a sharp slowdown during 2016, largely down to earnings and uncertainty over the presidential election, US payouts strengthened significantly, reaching a new record of $111.6bn up 9.8%. The region benefitted from a very large one-off special dividend from wholesaler-membership retailer, Costco as well as strong growth from the banking sector.
US software companies, pharmaceuticals and utilities also made a noteworthy contribution. US names among the list of the world’s 20 biggest dividend payers this quarter included the likes of Apple and Wal-Mart Stores.
The Fidelity Global Dividend Fund managed by Dan Roberts has around 36% dedicated to the US with a significant weighting in consumer staples and pharmaceuticals - names like Johnson & Johnson and Procter & Gamble are among the fund’s largest holdings.
The fund is known for its low turnover with the average holding period for each stock held approximately four years. As at 30 June 2017, 15 names in the portfolio had been held since the fund’s launch. So far this year there have been only three purchases in the fund - two of these are names he has previously held: Unilever and Dr Pepper, together with new addition Admiral.
3. Europe dominates
According to the Janus Henderson report, global dividends in the second quarter of this year were dominated by Europe (excluding the UK), with the region accounting for almost two-fifths of the global total. This is down to a number of reasons. First, European dividends are highly seasonal, with two-thirds of the total crop paid between April and June. This year, underlying growth in Europe increased 5.8%, with 86% of companies either raising or holding their dividend year-on-year.
Income hasn’t always been at the top of the agenda for European corporates. Wind the clock back ten years and equity income investing was simply not on their radar. But the financial crisis, the European sovereign debt crisis alongside an ageing population demanding income-orientated solutions and large-scale management change, have all driven a sea change in European boardrooms.
Financials companies like Allianz, UBS, ING and many of the Scandinavian banks have put dividends at the forefront of their management strategy. Meanwhile, regulatory changes in the wake of the financial crisis have forced investment banks like UBS to change their models, with dividends taking central stage.
A fund tapping into Europe’s growing income offering is the Invesco Perpetual European Equity Income Fund managed by Stephanie Butcher. The fund has a good weighting in financials and pharmaceuticals. Names which make up the fund’s ten largest weightings, which also feature on this quarter’s list of the world’s biggest dividend payers, include French bank BNP Paribas and Italian lender, Intesa Sanpaolo.
The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. Reference to specific securities or funds should not be construed as a recommendation to buy or sell these securities or funds and is included for the purposes of illustration only. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.