In 2011, dividend-paying stocks outperformed the broader stock market and predictions for 2012 look good for them too.
The following are three “facts” (or extremely well-informed opinions) that you should know about dividend-paying stocks and funds.
Dividends Are Indicative of a High Quality Business
With valuations remaining at the lower end of their historical ranges, combined with low interest rates and market uncertainty, it’s no surprise that dividend-paying stocks are a compelling choice for many investors. High dividend-paying companies tend to be relatively high quality, established companies; hence they are less volatile and provide more certainty in tough times.
The presence of a dividend is evidence of a sustainable long-term growth-focused business, according to Job Curtis, who manages the gold-rated City of London Investment Trust (CTY). Dividends provide the ultimate sign of a company's financial discipline and its commitment to shareholder value, he explained as a recent investment conference.
Curtis himself is clearly focused on paying out dividends to investors in his own investment trust: according to Morningstar data and the latest research from the Association of Investment Companies (AIC), his fund has been increasing its dividend every year for the last 45 years.
Dividends are Going Global
It’s interesting to note that the source of equity income has changed geographically over time.
Jackie Beard, Morningstar’s director of closed-end fund research, recently discussed this geography trend during an expert panel discussion on global income. The panel discussed how funds often focus on traditional, dividend-paying markets, such as the UK, but many of these large dividend-paying UK companies often do the majority of their business in emerging markets. These UK-based companies are increasingly ‘going global’ and gaining exposure to international markets, thus giving investors more international exposure.
Meanwhile, dividends have become more globally available, with areas such as Asia Pacific beginning to offer investors compelling dividend yields. The silver-rated Schroder Oriental Income Fund (SOI) is one such fund that provides exposure to this market. Run by an experienced manager and supported by a strong, local team of 27 analysts, the fund has provided progressive dividend growth since launching in 2006.
Dividends Signal Confidence
It’s not a rule of thumb, but some studies demonstrate that the existence of dividend payments may be evidence of a company’s confidence in earnings growth. Dividends also indicate that a company has sufficient profitability to fund future expansion plans. Sam Morse, who runs the bronze-rated Fidelity European Values Fund (FEV) is one of the managers that focuses on capital growth, but nevertheless looks at how companies reinvest cash. He sees dividend payments as evidence that a company can sustain growth. After all, fund managers must ensure dividends and share prices ultimately grow hand-in-hand, since total return is what matters to investors at the end of the day.
