FocusPoint
Monthly Investment Newsletter February 2010: The time is ripe for high dividend strategies
High earnings growth is key driver for equities
Credit overweight reduced due to increased policy risk
The time is ripe for high dividend strategies |
High Dividend is the preferred investment style of o ur equity strategists. The importance of dividends in the total return of an investment portfolio will increase in a ‘lower growth, lower return’ environment which we are expecting.
In the current situation of extremely low money market rates, low government bond yields and sharply declined yields on investment grade credits, the ‘search for yield’ will intensify, also beyond the fixed income space.
We believe that stocks with high and sustainable dividend yields are particularly likely to benefit from this due to their income component.
After a period in which many companies have cut their dividends, we foresee that dividend uncertainty will decrease on the back of the strong earnings growth we expect for 2010.
We expect a dividend increase of at least 10% in 2010. This estimate is based on a sharp increase in corporate earnings, the normalisation of the equity markets and the substantially improved financial structure of many companies.
Our view is supported by the fact that dividend revisions recently turned positive. This should help to mitigate investors’ concerns about the stability of dividend payments.
Furthermore, the resemblance of the current situation with the years 2003 and 2004 is striking. In 2003, the equity market found a trough. In the year after, companies with high dividend yields in general, and companies which on top of that managed to grow their dividends in particular, outperformed the market.
Finally, the dividend yield is higher than the corporate bond yield in a number of sectors. This is particularly the case for the European Telecom and Utility sectors. The majority of our favourite sectors, such as Energy, Health Care and Telecom, offers attractive dividend yields.
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Relevant links
Senior Investment Specialist Ad van Tiggelen about Asset Allocation in October.