Generating a sustainably high level of income has never been as hard for investors. Indeed, while there are plenty of global income funds proliferating in the market, few pay a meaningful high dividend above inflation.
Ultra-low interest rates, negative or flat bond yields, traditional dividend-paying stalwarts facing cuts: at first glance, it appears the world has conspired against income investors. Indeed, the unprecedented monetary experiment born out of the Global Financial Crisis has created one of the most historically difficult periods for income-hungry investors.
Fortunately, there remain options for investors seeking income strategies and retirees searching for a consistent stream of retirement income. One area which continues to provide healthy dividend returns is global equity income.
While the MSCI All County index does not provide much margin after inflation and real interest rates, it is possible to construct a portfolio of robust higher yielding stocks. However, investors must ensure they have access to a truly global mandate to harness increasingly diverse growing income streams. Our strategy had a realised dividend yield of 4.32% over the last 12 months - higher than both the MSCI ACWI High Dividend Net TR Index (4.11%) and the MSCI ACWI Net TR Index (2.51%). To put this in context, the average global government bond currently yields 1.3%.
Evolving global dividend story
The evolving story of global dividends is underlined by accelerating dividend growth in emerging markets. China and India both recorded 33% dividend growth between 2015-2017, while the UK and the US delivered 10% and 11% respectively over this period. However, this trend is not often reflected in most global dividend-focused portfolios. Historically, global income portfolios have tended to herd their income exposures around the traditional dividend-payers in developed markets such as the UK and the US.
Global income portfolios do have a natural overweight bias to the US, as the home of the dividend aristocrats, such as Johnson and Johnson which has raised its dividend for 56 years in a row. But, ultimately, taking an oversized position in the US does not take account of the developing underlying global dividend story. Hence, we are underweight the US, taking a 41.2% allocation versus the respective index weighting of 55.1%. To truly harness the evolving global dividend picture, we have instead diversified our exposure to harness multiple income streams.
For example, we currently have a 7% exposure to China versus an index weighting of just 0.7%. China has witnessed a quantum leap in its attitude to shareholders, supported by corporate governance reforms. Adopting a new investor-friendly approach, companies have become more responsible stewards of capital and begun to reward investors with bigger cash pay-outs. Moreover, a drop in company debt levels has supported shareholder returns.
As fundamental, bottom-up, high active share investors, we are also unafraid to take high-conviction stock calls in countries or regions overlooked by the market. For example, we have taken advantage of a number of interesting opportunities in Norwegian-listed stock, representing a country overweight of 5% versus the index benchmark of 0.2%.
The power of pay-outs
As well as providing diversification of dividend streams, a well-constructed global income strategy should deliver a robust long-term investment. Dividends have been shown to be more stable than earnings through every recession since the 1970s and a culture of paying consistent dividends enforces corporate discipline - adequately rewarding shareholders while still retaining sufficient earnings to fund corporate growth.
The MSCI World High Dividend Index outperformed the MSCI World Index over the last two decades - returning 230% versus 174% respectively. Moreover, a fundamental income-focused approach can also access the magic of compounding delivered by high-income stocks; since 2019, the Global High Dividend Yield Equities Index has returned annualised performance of 6.3% with a lower level of volatility (15.7%) versus the Global Equities Index annualised return of 5.3% with 17.1% volatility.
We believe the key to unlocking the balance of high dividend and superior outperformance lies in rigorous assessment of balance sheets and leverage, as well as free cash flow generation. This helps avoid dividend traps where high-yield dividend pay-outs are simply too good to be true. A dynamic approach can also play interest rate sensitivity by allocating and rebalancing through the cycle, taking advantage of sectors that fare well in low-rate scenarios such as utilities, and playing sectors such as financials and industrials in a rising-rate environment.
A failure to take a truly global mandate overlooks the changing global dividend story. For income-hungry investors seeking access to high-yielding securities, accessing the new world dividend order can provide a rich long-term dividend harvest.
Roberto Magnatantini, manager of the OYSTER Global High Dividend fund at SYZ Asset Management