By Shan Gnanendran, EMEA Investment Strategist
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Reinvested dividends have been the greatest driver of equity returns over time. We recommend financially robust sectors and companies with the ability to sustain and grow their payouts.
While dividend strategies have historically performed well during periods of market volatility, they underperformed in 2020, hindered by widespread dividend cancellations, reductions, and suspensions. We believe long-term income investors should revisit dividend strategies in 2021, focusing on sectors and companies with strong balance sheets and reliable cashflows that are able to sustain dividends and preferably also grow dividends.
Rates staying lower for lower (highlighted in Outlook 2021 – Overcoming Financial Repression), presents investors with continued challenges in finding yield opportunities. In that context, Europe and the UK markets have some of the most attractive dividend stories globally, supported by the largest yield gaps to sovereign bonds.
While there is now improved broad appeal in European dividend strategies, selectivity can further enhance the opportunity. Divergences exist at both the sector and company levels. Consumer staples, healthcare, utilities and technology dividends have remained relatively stable, while dividends in the financials, materials, and energy sector are showing upside potential following a challenging 2020. At the company level, we are focused on those with strong balance sheets and cashflows.
Dividend grower strategies have proven their outperformance characteristics over the long-term. Since early 2003, dividend growers in Europe have provided annualised total returns of 6.9%, versus broader Europe which has returned only 4.2%. Furthermore, the long-term effects of compounding should also not be underestimated. Since 1995, reinvested dividends have accounted for over 50% of total returns in both Europe and the UK.Read European Strategy