19 February 2019 – Dividend growth shows the importance of income to total returns; mixed messages from the US economy; and China soars on trade talk hopes.
Investors tend to focus on capital growth when assessing the performance of their portfolios. We all like to see the value of our shares rising and worry when they go the other way.
But there’s plenty of evidence to suggest that the income from our shares, bonds and property investments is actually the biggest contributor to total returns over time. In part that’s because while markets go up and down, dividend income tends to be much steadier.
Not only can companies put some profits aside in the good years to keep paying a dividend in thinner times, their bosses tend to resist cutting a dividend. No-one wants to be the boss who cut the payout to shareholders.
So, investors have got used to a steadily rising dividend stream. Especially in this country where the stock market has always been a good source of income.
That’s been a notable feature of the period since the financial crisis. The income on cash and safe government bonds has collapsed since 2008 but dividend yields have remained pretty high. At the moment, the FTSE 100 is paying more than 4% on investors capital. With interest rates at less than 1% that’s very attractive.
The other good thing about dividend income is that it tends to rise over time, unlike the income paid by bonds which is fixed at the time of issue in most cases.
The latest data on dividend growth, from Janus Henderson, confirms this trend. Globally, dividend income rose 8.5% last year. That’s well above the long-term growth trend of between 5% and 7%. Nine in ten companies raised their payout last year.
Some sectors are big contributors to the total income paid out to shareholders. Oil and gas companies, miners and pharmaceutical companies are traditional dividend payers and they tend to be over-represented in the UK market.
That’s good news for UK investors as is the fact that the dividends paid by these companies are very often denominated in dollars. A falling pound, which is the recent experience, means these dollar dividends are worth more in sterling terms after translation.
One investor who understands the value of dividends, as well as pretty much everything else about investment, is Warren Buffett. The legendary investor writes a brilliant letter to shareholders in his investment company Berkshire Hathaway every year and the latest issue is due to be sent this coming weekend. It’s always widely reported on but if you want to read it yourself, which I recommend, it can be found at berkshirehathaway.com. Don’t worry, you’ll find it easily enough, there is very little else on this wonderfully retro website.
In terms of investor focus this week, the spotlight will be on a few pieces of data coming out of the US this week. We’ve got jobless claims, purchasing managers indices and home sales numbers. The reason investors will be looking so closely at these is the fact that last week’s retail sales data were so unexpectedly poor. They raised a big question mark over the health of the US economy, which had looked like the strongest in the world.
In practice it probably still is. There were some exceptional reasons why the December retail figures were week - to do with the timing of Thanksgiving. Most economists think there’ll be a bounce back in due course and they are taking more note of the employment data which looks very encouraging still.
As important as the figures this week, will be the minutes from the last Federal Reserve rate-setting meeting in January, which are due to be published on Wednesday. The January meeting was when the Fed staged an apparent U-turn, giving investors hope that it may be closer to the end of its interest rate tightening cycle than it had suggested only the previous month.
The final piece of US interest this week is the last few earnings reports in the fourth quarter season. With just 50 of the S&P 500 constituents left to report, the latest quarterly batch of results is just about done. As expected, earnings growth has slowed as last year’s tax cuts start to fall out of the equation, but the real interest will be how much further profits growth declines in the first quarter of 2019. This will be key to the sustainability of the New Year rally in stock markets.
The pick up in markets this year has nowhere been as dramatic as in China where hopes for a resolution in trade tensions and the belief by many investors that last year’s 25% sell off was overdone have seen Chinese stocks soar in the year to date.
The CSI index of shares in Shanghai and Shenzhen jumped by more than 3% at the beginning of this week on relief that Beijing and Washington continue to talk despite last week’s lack of real progress on trade. Even before Monday’s surge, Chinese shares had jumped 11% year to date on the back of the easier approach by the Fed.
Lower US interest rates, especially if they lead to a weakening of the dollar, are seen to be a good thing for emerging markets generally and China in particular. Add in the prospect of delayed or cancelled tariff hikes and very low valuations and the Chinese market was well set for a return to favour this year.
That’s definitely not been the case in Europe where investors have pulled out of the region’s stock markets at their fastest rate since the period immediately following the EU referendum in 2016. European equity funds saw $6bn of outflows last week, the second worst on record sine records began in 2000.
The outflows were felt both on the continent and in the UK, where Brexit uncertainty remains at fever pitch.
Businesses are complaining that the government’s apparent policy of running down the clock to force acceptance of Theresa May’s withdrawal deal is making it impossible to plan ahead. Business investment has fallen in the UK for four consecutive quarters. For big exporters and importers the problem is even more acute. They simply do not know whether ships setting sail today will be able to unload their cargoes on arrival if that is after March 29, the date on which Britain is due to leave the EU.
Whether that actually happens is still uncertain. Even more so after a dramatic move at the beginning of this week by seven high profile Labour MPs who have quit their party, in part as a protest over their leadership’s handling of Brexit.
Whether or not this triggers further departures, it is the latest signal that a vast swathe of the country’s parliamentarians, and the people generally, are dissatisfied with the way the two main parties are representing their interests. The next six weeks promise to be nothing if not interesting in Britain. Typically, interesting politics is not good news for investors who crave predictability so it remains to be seen if the post-Christmas rally can survive the heightened tensions in Westminster.
For those investors more concerned about corporate than political newsflow there is plenty to watch out for. Top of the agenda this week will be the banks, which are of course one of the sectors most exposed to the general health of the economy.
Last week Royal Bank of Scotland raised hopes that British banks are finally on the mend after a testing decade since the financial crisis. RBS announced a second consecutive year of profits and paid out a bigger than expected dividend, although it did simultaneously warn that Brexit posed a real threat to the current year’s prospects.
This week, it is the turn of Lloyds, HSBC and Barclays to report. Other big companies in the spotlight this week include retail property investor Intu, which will update on the collateral damage from the deep-seated problems facing bricks and mortar retailers. We’ve also got numbers this week from Reckitt Benckiser and Intercontinental Hotels.