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