Equity dividend strategies could enhance the stability of a portfolio during bouts of inflation or deflation, according to a new report by Allianz Global Investors. High and sustainable dividend yields proved an “anchor of stability” in the past, the report says.
"Dividend strategies in an environment of inflation and deflation," is based on an analysis of the performance of equity dividend strategies during periods of inflation and deflation over recent decades in markets such as the United States and Japan.
The key findings of the report are:
- Shares with sustainably high dividend yields could bring stability to a portfolio amid inflation or deflation.
- High dividend payout ratios may be accompanied by above-average rather than below-average future earnings growth.
Dr. Klaus Telöken, the Chief Investment Officer (CIO) for the Systematic Equity Team and Dr. Kai Hirschen, the team’s Portfolio Manager, says: "High and sustainable dividend yields not only offer investors a certain amount of protection in both inflationary and deflationary environments, but also have proven in the past to be an anchor of stability in a tough market environment."
Investing in an equity dividend strategy in the past proved a successful way to weather rising inflation, according to their analysis.
From the late 1960s until the early 1980s the world experienced very high inflation, peaking at over 7% in Germany and almost 15% in the United States.
From 1967 to 1982, a dividend strategy in the U.S. achieved real growth of almost 4.0% per year, outperforming the broad equity market and fixed income investments.
Analysis shows that on average, shares which were able to pay high dividends despite a tough economic environment performed significantly better and even increased their value over time.
"Long-term investors who followed dividend strategies managed to more than maintain their purchasing power during the inflationary years," the report says.
The report examined the performance of a Japanese dividend strategy over about two decades since the Japanese equity market’s peak in 1989. Dividend strategies outperformed the Japanese equity market during a period of deflation.
High and sustainable dividend yields have also been used as part of a defensive investment strategy, the analysis shows.
A dividend strategy in the U.S. equity market over the last 60 years, on average, outperformed the overall market during negative stock market phases.
Companies with the highest dividend yields are more likely to come from defensive sectors such as utilities, energy and telecommunications. They are generally bigger, established companies with solid balance sheets, attributes usually valued by investors in a difficult market.
The report also challenges the belief that high dividend payouts by companies could curb their growth.
"Many studies have shown that high payout ratios generally accompany above-average earnings growth, not below-average earnings growth," the report says.
U.S. companies in the Standard & Poor’s 500 from 1980-2010 showed a positive correlation between their dividend payout ratio and future earnings growth over one, three and five years.
One reason for the strong relationship between dividend payout ratios and earnings growth could be the discipline required by companies paying high dividends, the authors say.
"Scarce resources will prevent overinvestment in ultimately unprofitable projects or even in value-destroying acquisitions. Ultimately, this may lead to higher profitability and higher growth for the company."
The authors look at the past, with no guarantee that this can be extrapolated into the future.
