- Dividends and inflation have accounted for 99.7% of returns from 1929.
- A global look at the dividend environment shows that there are excellent opportunities for dividend growth.
- The dividend environment has also been distorted by the accommodative central bank policies as yields are very different now, while the companies paying them aren’t that different.
Back in October, I wrote an article that discussed 8 charts that show how the stock market doesn’t always go up.
Aside from these charts, I discussed the research of Professor Emeritus Edward F. McQuarrie, from the Leavey School of Business at Santa Clara University. What’s interesting from his research is that he found that dividends and inflation contributed to 99.7% of investing returns since 1929, which is a mind-blowing number.
If you would have invested $10,000 in 1929 and reinvested the dividends, your portfolio would have been worth $9 million in 2009. However, if we omit the dividends and inflation, the same portfolio would have been worth just $33,000. Thus 99.7% of the returns over the period can be thanked to dividends and inflation which is a great introduction to the importance of dividends for long term returns.
Today, I’ll analyze the current dividend environment to see what dividend investors can expect and whether dividends are the way to go.
The Current Dividend Environment: Dividends Are Growing
Each quarter, Janus Henderson creates a dividend index which is a good tool to look at for how dividends evolve as it analyzes dividend payments of the largest 1,200 global companies by market capitalization. Before digging deeper, it’s important to see the average yield isn’t that high.
The S&P 500 dividend yield is at 1.81% which is significantly lower than the historical average of 4.37% which is something to keep in mind.
It’s interesting that the Janus report doesn’t mention the historically low dividend yield. That’s how Wall Street works, it’s always about relative and never about absolute performance. Nevertheless, let’s dig into the data.
Dividends in North America and the Asia Pacific region, excluding Japan, have seen the fastest growth in the last 7 years. Japan has also performed well, the UK has declined after the weakening of the pound, while emerging markets’ dividends declined significantly after 2014 and lower commodity prices. As I’ve been saying for a while now, the situation in Europe isn’t that good and it’s also reflected in poor dividend growth despite the huge accommodative activities by the European Central Bank.
What’s interesting to see is that the Asia Pacific region and emerging markets give as equal a contribution to global dividends as North America.
Both give a contribution of 41% to the dividend index and we know that the market capitalization of emerging market companies is much lower than North American companies. Additionally, emerging market dividends are still relatively low due to lower commodity prices. Given this, we can say that there is a clear distortion in the global dividend environment where emerging markets and Asia Pacific should be the place to look for dividends.
It’s also interesting to look at the dividend trends per sector. The technology sector has really outperformed since 2012, financials and consumer discretionary have also seen good growth, basic materials are recovering, while telecommunication, oil, gas, and utilities are the worst performers.
As we know that basic materials are cyclical, it might be really a good idea to look at them for dividend growth, especially in emerging markets given the relative cheapness.
A look at the best dividend payers is also interesting as it shows how the dividends are paid all over the world and thus it all boils down to valuations.
Let’s now take a look at yields.
China Mobile (NYSE: CHL) has a yield of 4.12%, China Construction Bank (OTCPK: CICHY) has a yield of 4.71%, Taiwan Semiconductor Manufacturing’s (NYSE: TSM) is 2.34%, the Commonwealth Bank of Australia (OTCPK: CBAUF) has a yield of 7.5%, Royal Dutch Shell (NYSE: RDS.A) has a yield of 5.56%, Westpac Banking Corporation’s (NYSE: WBK) yield is 5.99%, Exxon’s (NYSE: XOM) is 3.59%, Apple’s (NASDAQ: AAPL) is 1.47%, Gazprom’s (OTCKP: OGZPY) yield is 5.99%, and Vodafone (NASDAQ: VOD) has a yield of 3.67%.
If you take a look at global dividend yields, you can find relatively good returns especially when compared to the S&P 500.
Given that 99.7% of long term returns come from dividends and inflation, looking for companies that protect your portfolio from inflation and pay sustainable dividends, that are significantly higher than what the S&P 500 pays, might be a very smart way to go especially if you want protection and income. If you take advantage of the discussed cyclicality in basic materials, you will do even better.