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Equities | Asset Allocation

Why Dividend Equities Matter

  • Dividend reinvestments can help offset some effects of inflation.
  • Companies that consistently grow dividends historically outperformed their peers.
  • Dividend growers historically showed better performance with lower volatility.

Earning income in portfolios is especially challenging in the current market environment. While interest rates may rise from current levels, Citi analysts do not expect them to do so by much1. As inflation runs higher, real yields on cash and fixed income remain low.

 

1. Offsetting the effects of inflation

Since 1990, the average US inflation rate has been 2.74%2 per annum, while the gains from reinvesting dividends in the S&P 500 has been 2.19%2 a year. Simply put, earning and reinvesting dividends have provided a way of counteracting the detrimental effects of inflation. Figure 1 illustrates how reinvesting dividends can help offset some effects of inflation while achieving positive returns.

Figure 1: Reinvesting dividends helps to counteract the adverse effects of inflation.

Source: Haver Analytics as of Sept. 30, 2022. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary.

Looking within Asia ex-Japan, the Consumer Price Index, which tracks the price of a basket of goods, had been 2.9%2 on average since 1995 while the dividend yield was 2.5%3, demonstrating the critical ability of dividend reinvesting to offset the effects of inflation.

 

2. Dividend growers show better risk efficiency

Dividend growers exhibit both higher annual returns and lower volatility than companies with simply high dividend yields. This is possible because stocks with high yields tend to cut their dividends when times are bad, which reduces total returns and increases volatility. Dividend growers, however, tend to be higher-quality, financially robust businesses that hold up in down markets and can grow their payouts. This ultimately makes for a steadier ride amid choppy markets.

Figure 2: Dividend growers historically showed higher performance with lower volatility

Source: Citi Global Investment Lab, Bloomberg. Data as of Jul 28, 2022. Starting period for performance and volatility September 21, 2015. World Equities: Growers is the MSCI World Dividend Growers Quality Select Net Total Return Index, ‘High Yielders’ is MSCI World High Dividend Yield Net Total Return Index. US Equities: ‘Growers’ is S&P Dividend Aristocrats Select Net Total Return Index, ‘High Yielders’ is S&P 500 High Dividend Yield Select Net Total Return Index.

 

3. Dividend growers outperform indexes

Historically, companies that consistently grew their dividends have outperformed their benchmark index. Citi’s Office of the Chief Investment Strategist (OCIS) team’s view is that quality, dividend grower companies can continue to outperform going forward4.

Companies with robust balance sheets and the potential to grow their cash flows tend to be financially stable and profitable.

Currently in our dividend grower basket are several global pharmaceutical and software companies.

Figure 3: Dividend growers indexes vs parent indexes

In conclusion, dividends from equities may protect investors from inflation that they can’t get from cash or bonds. Looking at long-term viability, quality and dividend grower equities have also historically outperformed their benchmarks while providing lower volatility than high yield equities.

 


Sources:

1 Citi Private Bank Office of the Chief Investment Strategist (OCIS), Outlook 2022.

2 Haver Analytics as of Sept. 30, 2022

3 Bloomberg as of Sept. 30, 2022. Dividend yield was obtained from the dividend yield of the MSCI Asia ex-Japan Index.

4 Citi Private Bank Office of the Chief Investment Strategist (OCIS), World Investment Navigator, March 2022.

For all charts: Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Past performance is no guarantee of future results. Real results may vary.

Investment Products are (i) not insured by any government agency; (ii) not a deposit or other obligation of, or guaranteed by, the depository institution; and (iii) subject to investment risks, including possible loss of the principal amount invested. Past performance is not indicative of future results: prices can go up or down.

INVESTMENT PRODUCTS: NOT A BANK DEPOSIT • NOT GOVERNMENT INSURED • NO BANK GUARANTEE • MAY LOSE VALUE