If you think dividends are just an Australian phenomenon, think again. Around the world, dividends are expected to grow.
Australians seeking dividends often see little need to invest overseas. Why should they, when companies at home offer generous distributions and franking credits? That approach has paid off in recent years. But it is not perfect.
Just six companies – the big four banks, BHP Billiton, and Telstra – contributed to almost half of the S&P/ASX 200 index’s dividend yield last year. The lack of diversification should sound alarm bells. And there are concerns if these big payers can sustain their dividends given the weak domestic economy. Is it prudent to rely on such a small part of the Australian stock market for income?
A global trend
Dividends are not just an Australian phenomenon. Around the world, they have been growing and are likely to continue. Here’s why:
1. Companies are cash rich. This allows them to dish out dividends even in uncertain times. Strong balance sheets helped US multinationals like consumer goods company Procter & Gamble grow their dividends even as the rising US dollar ate into their earnings.
2. Some energy firms will defend their dividends. Weak oil prices have hurt the energy sector. But it may take a lot more for some companies to break with their long traditions of paying and growing dividends. Chevron, for one, has raised its dividend every year for more than 20 years.
3. Banks are recovering post the financial crisis. Major banks in the US passed the Federal Reserve’s stress test this year and won approval for dividend increases and share buybacks. Notably, Citigroup raised its dividend for the first time since 2008.
4. A dividend culture is taking root in more markets. In Japan, corporate governance reforms are prompting hitherto cash-hoarding companies to increase shareholder returns. Fanuc offers a recent example. The industrial robot maker unexpectedly raised its dividend payout ratio and proposed share buybacks in April.
There may be a few headwinds. Slower growth in some economies could weigh on corporate earnings. Oil prices could stay weak. And periods of US dollar strength might hold back profits for some US multinationals. But these factors are unlikely to tip the balance against dividend growth.
The overall outlook for dividends around the world remains bright. Global stocks may not replace Australian stocks in your income portfolio, but they can be an attractive complement.
Andy Budden is an investment specialist. He has 22 years of investment industry experience and has been with Capital Group for 11 years. Before joining Capital, he worked at Watson Wyatt Investment Consulting. Andy is based in Singapore.
