Dividend yields generate outperformance when faced with troubled times

*This content is brought to you by Overberg Asset Management

By Nick Downing, CEO and Director*

Nick Downing, Overberg Asset Management.
Nick Downing

Numerous studies have shown that shares which pay high dividends beat the market. Jeremy Siegel, author of the best-selling investment analysis book, “Stocks for the long run” (published 2014), has proved it empirically with a study of the S&P 500 index. On December of each year from 1957 to 2012, he sorted the firms in the S&P 500 index into five groups (quintiles) ranked from the highest to the lowest dividend yields and then calculated the total returns over the next calendar year. The results are striking. A $1000 invested in an S&P 500 index fund in 1957 would have accumulated $201,760 by the end of 2012, for an annual return of 10.13%. An identical investment in the 100 highest dividend yielders accumulated to $678,000, with an annual return of 12.58%. The lowest dividend yielders not only had lower returns they also suffered greater volatility. If the market has a beta of one, high yielders enjoyed a beta of less than one and low yielders a beta of more than one.

The strategy is especially relevant in today’s market environment of global supply shocks in food and energy, excessive inflation, surging interest rates and bond yields and the increasing risk of recession. In an MRB Partners report titled “Dividends pay dividends in tough times” (July 26, 2022), Peter Perkins writes that “Dividends are more stable than earnings and provide a buffer for equities during periods of weakening global economic growth…Like earnings, dividend payments are sensitive to the economic cycle, but less so, with companies typically reluctant to cut dividends in anything but exceptional circumstances.” The dividend amount paid to shareholders in relation to the total amount of net income a company generates is known as the dividend payout ratio. This ratio is typically well below one which means companies have capacity to maintain a stable dividend even when earnings decline by lifting the dividend payout ratio.

According to MRB Partners, reinvested dividends have accounted for approximately 40% of aggregate total return for global equities since 2000. Global high yielding stocks outperformed during the past three US recessions. As expected, performance has also been more stable. While for most of the past three decades dividends and earnings have grown at a similar pace, the variation in annual dividend growth has been less than half that of earnings. Currently, “the global dividend payout ratio is toward the lower end of its historical range and has ample room to rise as economic growth weakens.”

The MRB report concludes, “beyond the near term, dividends are likely to play a more important role in equity returns than has been the case in recent decades. In fact, we expect dividends to account for the majority of equity total returns in the next decade for most markets and the global benchmark as the tailwinds of three decades of strong real earnings growth and rising P/E ratios fade.”

OAM’s global portfolios contain numerous high yielding shares, which help to drive and stabilise performance. The list below summarises the company name, dividend yield and growth in net asset value over the past five years. These companies are all listed on the London Stock Exchange and due to weak market sentiment, all currently trade at substantial discounts to net asset value, providing an added margin of safety. Their high dividend yields combined with their cheap valuations (NAV discounts) place the portfolios in a strong position to continue generating healthy and stable returns, even in troubled times.

To increase your dividend exposure for your own portfolio, reach out today. Our Wealth Managers can guide you.

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  • All writers’ opinions are their own and do not constitute investment recommendations or financial advice. Speaking to a qualified wealth and investment professional is crucial before making financial decisions.
  • Overberg Asset Management (Pty) Ltd. is an authorised financial services provider: 783

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