Elegant analysis compiled by Germany's DWS Investments demonstrates the importance of taking dividends into account when buying equities - at a time when yields on core European debt are so low some managers are effectively refusing to put new money to work in 'safe' fixed income markets.
Elegant analysis compiled by Germany’s DWS Investments demonstrates the importance of taking dividends into account when buying equities – at a time when yields on core European debt are so low some managers are effectively refusing to put new money to work in ‘safe’ fixed income markets.
Whichever way you look at it, European bond income is risky.
In peripheral Europe fund managers have stopped lending money to Greece and will only do so to Spain, Italy and Portugal at exorbitant rates.
In core Europe, some money market fund managers have also effectively stopped lending to Berlin, Paris and London, for example – by capping their funds – as yields on their debt are impossibly low.
Against this backdrop, we present today three diagrams of equity dividend analysis compiled by German asset manager DWS Investments.
The first chart (below) shows the performance of high dividend stocks versus the performance of the overall equity markets they focus on, and demonstrates the power of selecting stocks for their distributions.
Globally, the proportional difference in performance was 38%, in favour of high dividend stocks. The gap was about the same for Europe ex-UK equities, though it narrowed significantly for US stocks.
Interestingly, a focus on high dividend stocks also worked well for equity investors in Asia ex-Japan, traditionally defined as ‘growth’ markets where capital gains are more important than income.
The second diagram (below) shows the long-term make-up of real annualised returns from equities, over 42 years, by region.
Multiple expansion – effectively share prices rising – has made a small contribution to the total returns from shares everywhere except Australia, France and Germany, where it has actually reduced the performance of the equity markets.
Even in the US, traditionally portrayed as a growth market where dividends play a lesser role, dividend growth and yield still make up far more of the total return than multiple expansion.
The final of three diagrams from DWS Investments (below) shows how important it is to concentrate on dividends, or at least avoid companies that cut theirs.
Since 1972, companies that cut their distributions have provided a 0.4% annual loss – or 15% over the whole period – for their shareholders. A payer of constant dividends made its shareholders 7% a year, or 1,435% over the period.
Focus on companies growing their dividends made the best returns, according to DWS – 9.5% a year, or 3,786% over the entire period.
For more on dividends and equity income investing, see the rest of our Focus On Dividends series during this week.
Sometimes referred to as the ‘biggest manager you have never heard of’, Jonathan Boyd has caught up with PGIM for insight into its Europe region developments as part of global expansion