Terry Smith, chief executive of Fundsmith, has outlined his view of ETFs, Dividends and the sovereign debt crisis - and how these may develop through the rest of 2012.
The historic dividend yield on the Fundsmith Equity Fund at year end was 2.4%. This dividend was covered 2.6 times by earnings. There is only one stock in the Fund that does not currently pay a dividend. This is significant: it is becoming clear that dividends are likely to provide a more significant portion of the total return on equities in the future than they did in the equity bull markets of 1982-2000 and 2003-07. Research from GMO LLC shows that taking a longer view, during the period 1871-2009 dividends accounted for over 90% of total return on equities in the US market. Moreover, this is not just a US phenomenon. The same patterns hold true across a wide variety of global equity markets. For instance, across markets in Europe, 80% to 100% of the total returns achieved since 1970 have come from dividends (combining yield and real dividend growth).
We view the year ahead with some trepidation. It seems that it has yet to dawn on many of the key participants in the financial crisis that you cannot borrow and spend your way out of a crisis caused by over-leverage, and that there is no higher authority than the governments whose credit is now in doubt which can extend further funds to provide a painless ‘solution’ or maybe even a temporary respite. The dawning of this reality is sure to have some very painful consequences.
However, in contrast the Credit Default Swaps of Nestle have been less expensive than the cost of insuring against default on the debt of European governments and the US Treasury for some time. We are far from believers that the market is always right, but this does suggest that holding shares in major, conservatively financed companies which make their profits from a large number of small, everyday, predictable events is a relatively safe place to be if you have the patience, fortitude and liquidity to ride out the share price volatility which is likely to occur in such circumstances. And that’s exactly where and how the Fundsmith Equity Fund is invested.