A favourable regime for dividends? – M&G (Lux) Global Dividend Fund

9 min read 28 Jan 25

  • Dividends matter because they provide a solid foundation for equity returns over the long term; they are also pertinent now as we enter a world of potentially lower returns, where income could account for a greater part of the total return from equities.
  • We advocate a focus on dividend growth, which as a strategy benefits from a long-term tailwind but also provides the potential for inflation protection should the environment of stubborn inflation persist.
  • The M&G (Lux) Global Dividend Fund, with its diversified approach to dividend investing, is ideally placed to deliver, in our view, against the backdrop of a broadening market.

New market regime

Global equity markets have been riding high in the past two years, driven to a large extent by excitement about artificial intelligence (AI). During this period, the market gains have been concentrated in a narrow category of mega-cap US stocks, known as the ‘Magnificent Seven’ (Mag 7).

In this polarised market, defensive stocks and dividend-paying companies have been largely forgotten. However, we believe the narrow market leadership has created attractive valuation opportunities beyond the Mag 7.

As we look ahead to 2025, we see potential for a shift in market dynamics. We could be entering a new market regime where investors look beyond the Mag 7 and embrace a broader range of investment opportunities and, potentially, rediscover the value of dividends.

Why dividends?

We believe investors ignore dividends at their peril. Despite being overshadowed by ‘new economy’ stocks in the recent bull market, history shows that dividends act as a major driver of equity returns over the long term.

Figure 1: Ignore dividends at your peril

MSCI ACWI Index: split of total returns over 30 years       

Past performance is not a guide to future performance

  • Dividends matter: they account for the majority of total equity return over the long term
  • This illustrates how powerful reinvesting dividends can be owing to the benefits of long-term compounding 

 

1Source: M&G, 31 October 2024.

Over the past 30 years, more than half of the total return (the combination of capital growth and income) from global equities has been derived from reinvested dividends owing to the benefits of long-term compounding (Figure 1).

The MSCI ACWI Index has generated an annualised total return of 8.1% during that time, with 55.1% from capital appreciation and 44.9% from income[1]. Dividends matter for long-term investors.

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. Past performance is not a guide to future performance. The views expressed in this document should not be taken as a recommendation, advice or forecast and they should not be considered as a recommendation to purchase or sell any particular security.

Safety in the face of uncertainty

We believe dividends are also indicative of a company’s quality:

  • Capital discipline. Dividends demonstrate commitment to shareholder value.
  • Financial strength. Consistent dividends are only possible with the backing of a robust balance sheet.
  • Corporate confidence. Dividends provide the ultimate signal of confidence in future growth.

Dividends provide a solid foundation for long-term equity returns, in our view, with a reliable income stream from quality companies. We think these characteristics also mean dividends are potentially valuable in today’s uncertain markets.

Currently, consensus expectations are firmly set on a soft/no landing scenario, where inflation comes down without causing a recession. Given that the majority of investors appear to have a positive outlook for the economy, if the economic environment deteriorates, we could well see an increase in market volatility. In the event of a downturn, or hard landing, dividend-paying stocks, which tend to be found in defensive areas, could offer some safety in uncertain times.

We believe the diversification that dividends offer could be beneficial in a market which may experience greater breadth and has potential downside risks.

Why dividend growth?

Another factor that investors have to contend with is persistent inflation. The process of disinflation appears to have stopped in the US, at least, and there are worries that inflation may accelerate again if tariffs become a reality.

We believe dividends are a potential solution to this challenge. Investing in companies that consistently grow their dividends offers an excellent way to protect investors from the ravages of inflation. Over the past 25 years, dividends from the S&P 500 Index have increased with an annualised growth rate of 5.9%, more than double the US Consumer Price Index (CPI)’s 2.3% during that time[2] (Figure 2).

Figure 2: Inflation protection from real growth

Past performance is not a guide to future performance

Source: S&P Dow Jones Indices, Bureau of Labor Statistics, Bloomberg, 29 November 2024.

1 Source: M&G, 31 October 2024.

2 Sources: Dividend growth - S&P Dow Jones Indices, 30 September 2024; CPI - Bureau of Labor Statistics, 13 November 2024

This inflation-beating track record has been achieved across some testing periods, including the bursting of the technology bubble in 2000, the global financial crisis in 2008/2009 and more recently the Covid shock in 2020. Dividends have not only provided resilience but real growth across the vagaries of economic cycles.

Dividend growth is a central tenet of our approach to dividend investing. We believe that it is essential to focus on companies that consistently grow their payouts over time, rather than look for companies with high yields.

Not only do progressive dividend policies (whereby firms raise their dividends year after year) play a crucial role in protecting real returns, we believe dividend growth also matters from an investment standpoint because it has demonstrated that it can be a winning strategy. In the US, so-called Dividend Aristocrats, companies which have increased their dividends for 25 years or more, have outperformed the S&P 500 over the long term.

For this reason, the powerful effect of compounding by reinvesting dividends into growth over the long term is a central tenet of M&G’s dividend growth philosophy.

Why dividends now?

After an impressive bull run, few investors are expecting global equity markets to deliver similar gains in 2025. We believe it is time for dividends to reassert themselves. In a world of lower returns, dividends will potentially account for a greater proportion of the total return from equities. In addition, dividend strategies, which tend to be defensive by nature, may attract more interest as a less volatile exposure to equities, as a pick-up in market volatility becomes an increasing possibility.

The backdrop of falling interest rates may also steer dividends towards the limelight. For those seeking new sources of income, equity income is an obvious consideration not just for reliable income but for growing income potential.

Why the M&G (Lux) Global Dividend Fund?

An active stockpicking strategy with diversified sources of alpha is best placed to outperform, we believe, following a period of narrow market leadership dominated by the new economy. Diversification is key, in our view, in a market scenario where we envisage a broader range of contributors.

The M&G (Lux) Global Dividend Fund is designed to cope with different market conditions. We seek to construct a balanced portfolio by investing in three distinct categories of dividend paying companies: quality, assets and rapid growth. Although they all grow their dividends, they each have different characteristics – quality companies tend to be more defensive, whereas assets are more cyclical. This diversified approach to dividend investing seeks to help the fund perform in a variety of environments.

Yield premium

Despite changing market dynamics, we believe the fund is well placed for the future due to our unwavering focus on valuation. In recent months, we have been taking advantage of attractive opportunities in a polarised market to increase exposure to selective areas, particularly those with defensive characteristics which are now available at significantly lower multiples and higher dividend yields compared to recent years.

Putting our valuation discipline into practice, we have been active in our portfolio management, recycling proceeds from our winners, which are typically low yielding, into more attractive candidates, which are often high yielding.

As a result, the fund’s yield spread relative to global equities is currently almost as high as it has ever been. A forecast yield of 3.61% (gross) provides an attractive entry point, in our view, for an income stream growing in excess of inflation (Figure 3).

Against a backdrop of uncertainty, we believe a diversified portfolio of dividend-growing companies can thrive and has the potential to deliver investors a compelling combination of attractive long-term returns and a growing income stream over time.

Figure 3: Attractive entry point for a growing income stream?

Premium yield and near-record spread vs global equities 

Past performance is not a guide to past future performance

3Source: M&G, Bloomberg, 30 November 2024. Income not guaranteed.

M&G (Lux) Global Dividend Fund performance
 

Past performance is not a guide to future performance

Rolling period performance
(%)
Year to
end of
MRQ3
YTD 1 Month 3
Months

Months
1 Year 3 Years
% pa
5 Years
% pa
10 Years
% pa
FMT
% pa
Gross - EUR A Acc 24.7 24.7 1.0 6.1 11.1 27.7 11.6 12.6 11.1 11.8
Net - EUR A Acc 22.4 22.4 0.9 5.6 10.0 22.4 9.4 10.4 8.9 9.9
Benchmark1 25.3 25.3 -0.4 6.7 9.3 25.3 8.8 11.9 11.2 10.9
Sector2 15.7 15.7 -1.4 2.2 6.0 15.7 6.1 7.8 7.7 8.1
Quartile Rankind 1 1 1 1 1 1 1 1 1 1
Calender Year performance
(%)
2024 2023 2022 2021 2020 2019 2018 2017 2016 2015
Gross - EUR A Acc 24.7 11.7 -0.4 23.3 5.7 26.6 -6.9 10.5 21.7 -0.3
Net - EUR A Acc 22.4 9.6 -2.3 20.9 3.7 24.1 -8.7 8.4 19.3 -2.3
Benchmark1 25.3 18.1 -13.0 27.5 6.7 28.9 -4.5 9.5 11.7 9.3

1
Performance comparison: The benchmark is the MSCI ACWI Net Return Index. The benchmark is a comparator against which the fund’s performance can be measured. It is a net return index which includes dividends after the deduction of withholding taxes. The index has been chosen as the fund’s benchmark as it best reflects the scope of the fund’s investment policy. The benchmark is used solely to measure the fund’s performance and does not constrain the fund's portfolio construction.
The fund is actively managed. The investment manager has complete freedom in choosing which investments to buy, hold and sell in the fund. The fund’s holdings may deviate significantly from the benchmark’s constituents. The benchmark is not an ESG benchmark and is not consistent with the ESG Criteria.
The benchmark is shown in the share class currency. Fund performance prior to 7 December 2018 is that of Euro A Acc shares of the M&G Global Dividend Fund (a UK-authorised OEIC), which merged into this fund on 7 December 2018. Tax rates and charges may differ. Prior to 1 January 2011 the benchmark was the FTSE World Index. Between 1 January 2012 and 19 September 2018 it was the MSCI ACWI Index, all stated as Gross Return. Thereafter it is the MSCI ACWI Net Return Index. Net Return indices include dividends after the deduction of withholding taxes.
2 Sector: Morningstar Global Equity Income Sector;3 Year to end of Most Recent Quarter: 31 December 2024; 4 Start of Fund Manager Tenure: 18 July 2008

Source: Morningstar Inc. 31 December 2024, EUR A Acc share class, income reinvested, price to price, net of all fees. Gross returns are product returns (priced at midday) from Morningstar, with the actual Ongoing Charge Figure reinvested back into the price, including income reinvested. Fund performance prior to 7 December 2018 is that of the M&G Global Dividend Fund (a UK-authorised OEIC), which merged into this fund on 7 December 2018. Tax rates and charges may differ.  Performance data does not take account of commissions and costs incurred on the issue and redemption of units.

Fund description

The fund has two aims: to provide combined income and capital growth that is higher than that of the global stockmarket (as measured by the MSCI ACWI Net Return Index) over any five-year period; and to increase the income stream every year in US dollar terms while applying ESG (environmental, social and governance) criteria. At least 80% of the fund is invested in the shares of companies from anywhere in the world. The fund usually holds shares in fewer than 50 companies. The investment manager focuses on companies with the potential to grow their dividends over the long term. Stocks are selected with different sources of dividend growth to build a fund that has the potential to cope in a variety of market conditions. The fund may invest in China A-Shares via the Shanghai-Hong Kong Stock Connect and the Shenzhen-Hong Kong Stock Connect.  The fund invests in securities that meet the ESG criteria, applying an exclusionary approach and positive ESG tilt as described in the prospectus. The fund’s recommended holding period is five years. The fund is actively managed and has the MSCI ACWI Net Return Index as its benchmark.

Main risks associated with this fund

The value and income from the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.

The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments.

The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment.

Investing in this fund means acquiring units or shares in a fund, and not in a given underlying asset such as building or shares of a company, as these are only the underlying assets owned by the fund.

Further risk factors that apply to the fund can be found in the fund's Prospectus.

Sustainability information

The Fund promotes Environmental/Social (E/S) characteristics and while it does not have as its objective a sustainable investment, it will have a minimum proportion of 20% of sustainable investments

The Fund’s sustainability information is available to investors on the Fund page of the M&G website here.

By Stuart Rhodes

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

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