Economy | Equities
Learning to Appreciate Dividends Again
Posted onAs discussed in our Mid-Year Outlook, the strongest annual returns for this new economic cycle may be behind us. Expectations of a strong economic recovery have been priced into most financial markets. This is in no way a bearish view on the future, but it does speak to a new reality for investors and their portfolios.
Citi analysts believe we are returning rapidly to a new normal. Growth may moderate further as peaking demand for consumer goods and the end of inventory replenishment are upon us. Citi analysts also remind readers that the pandemic is not over yet.
Given that the 38% return for global equities is behind us, Citi analysts have reduced weightings to some cyclical assets and are beginning to shift portfolios towards higher quality assets. One way to convince investors of a company’s growth prospects is growth in cash distributions.
Growth in dividends is consistent with management activities that are focused on the long-term health and competitive position of these companies. A firm’s capacity to grow dividends demonstrates their fortitude and commitment to shareholders.
Citi analysts believe that most investors undervalue dividends and the role they play in determining total investor returns. As shown in the chart, 52% of the total return in the S&P 500 has been earned by receiving and reinvesting dividends, even over the tech-dominated past three decades.
Focus on Dividend Growth not High Dividend Yield
Companies that are able to consistently grow dividends tend to outperform those delivering unsustainable payouts. There is a significant performance gap between companies that grow their dividend consistently versus those that cut or suspend their dividends. Over the last 47 years, this outperformance of dividend growers relative to dividend “cutters” is over 3% per year, with 30% lower volatility.
Citi analysts identify three sectors with sustainable dividend growth: 1) Health Care, (Pharma, in particular); 2) Select consumer staples with strong pricing power and 3) Semiconductors that power an increasingly digitized world.
