As bond yields and deposit rates fell, one product did pay dividends
Investors have turned to dividends which have been rising globally but the risk does need to be spread
Michael O’Leary: under his stewardship Ryanair has offered an attractive dividend yield. Photograph: Dave Meehan
For income-hungry investors, plummeting bond yields and deposit rates over the past few years have meant they have had to look for returns elsewhere. Thankfully, dividend paying equities have stepped into the breach, yielding payments of 4 per cent or more as well as offering investors the potential of capital gains. But does the bullish dividend yield environment still have time to run?
Dividends are payments a company makes to reward its shareholders. You can tell what a stock’s dividend yield is by dividing the annual dividend rate by the current share price – while a higher yield is typically better, this may mean the share price has fallen recently and may also be a sign of distress. Typically, you could expect more capital appreciation from companies that don’t pay dividends, but reinvest all cashflows into the business.
A major advantage to an investor of getting dividends is the impact reinvesting them can have on your portfolio. According to Ned Davis Research, an investor putting $10,000 (€7,424) into dividend paying stocks in 1969 would have since grown their portfolio to $753,092, based on this. Those who took their dividend would have only achieved growth of $201,982.
Globally, dividends have been rising. Since 2009, the S&P High Yield Aristocrats index, which tracks the performance of companies in the S&P Composite 1500, which have consistently rising dividends every year for at least 20 years, has grown at an annualised rate of 14.82 per cent. Apart from equities, investors can also consider real estate investment trusts (Reits) which invest in property. Irish Reits are yielding about 6 per cent for example.
Unsurprisingly then, money is flowing into high-yielding dividend stocks. Eleanor Hope Bell, head of UK SPDR ETFs with State Street Global Advisors, for example, notes that some $400 million has been invested in its US dividend product – which tracks the aforementioned aristocrats index – so far this year.
“People have realised that they’re not getting money from bonds or savings and that some equities can deliver you a 3-4 per cent yield. Meanwhile, they can also benefit from the recovery in economies around the world through a bit of capital appreciation,” says Kevin Troup, investment director with Standard Life in Edinburgh, adding, “and there is still a good positive outlook for dividend investing”.
Indeed a recent survey in the UK from data firm Markit pointed to a 5 per cent jump in dividends from Britain’s 350 largest listed companies this year, with a 9 per cent rise predicted for 2015. And this is not factoring in Vodafone’s exceptional dividend earlier this year. According to Markit, the top five dividend payers all have “projected yields” of more than 4.5 per cent, with pharma group GlaxoSmithKline, for example, yielding 5.2 per cent current share prices and HSBC Bank expected to increase its payment by 2.3 per cent to yield 5.2 per cent.
Why such a buoyant environment?
As Troup explains, companies with excess cash can reinvest this in the company by spending it on increased capital expenditure or M&A – but while there may be signs of a re-emerging M&A market, many companies are asking themselves ‘what will we do with our cash?’.
This is leading an increasing number to reward their shareholders by way of a normal or special dividend. Earlier this year for example, Irish investors benefited when Vodafone sold its US business to Verizon by way of a special dividend.