Partner Article

Stocking up on income

James Butterfill, global equity strategist at Coutts, looks at dividend growth.

Dividend growth pays when real interest rates are negative – and nearly two thirds of listed companies are currently increasing their payouts. But don’t just focus on those that yield the most.

The attraction of income-paying shares has not been lost on investors, who have had to endure a prolonged period of ultra-low interest rates. And for good reason – when real interest rates are negative (undershooting inflation), equities that offer an above-average yield come into their own, markedly outperforming other styles of equity investing.

What’s more, dividend payouts have been strong in the aftermath of the financial crisis as company balance sheets have returned to good health – and many companies chose to return cash to shareholders. But as a lot of companies have already increased their dividends, questions may be raised as to whether they can sustain healthy payouts.

Our analysis shows that 60% of companies are now growing their dividends – just below the post-recession high, but still well above the historical average. The market consensus expects the number of companies increasing their dividends to climb to a record high, by some margin.

We believe that the outlook for healthy dividend growth is bright, given the combination of historically low payout ratios and substantial cash on the sidelines.

The UK offers some of the most attractive yields – total dividend yield is at 3.7%. Meanwhile, in Europe the figure is a still-attractive 3% (slowing in peripheral Europe but growing in Germany), though there are signs that European companies may struggle to maintain their current rate of payouts. And high expectations for the consumer staples and industrials sectors leave them particularly vulnerable to disappointment.

In the UK, despite high dividend yields and high growth expectations, sustainability looks particularly strong in the consumer discretionary, healthcare, industrial and energy sectors. By contrast, dividends seem less sustainable in defensive sectors such as utilities and telecoms – which are the traditional safe havens for income.

But investors need to be wary when hunting for yield – a high yield alone is not a reason to buy a particular share, as it could mean the company has fallen out of favour. We would look for sectors where net dividend yields are historically above average and sustainable, and where there is room for dividend growth.

This was posted in Bdaily's Members' News section by Coutts & Co .