Hunting the dividend as an investment strategy

In an environment of low interest rates and full of uncertainties after the economic impact of COVID-19 In the economy, strategies that seek to hunt the dividend have taken hold for investors who seek superior and attractive returns that the bond market does not offer, since since the end of 2016, approximately 28% of all government bonds of advanced economies in circulation showed negative returns.

These strategies seek to obtain a constant and growing income, through stocks with a history of dividend growth. An allocation to companies that have sustainable and growing dividends can provide exposure to high-quality stocks and higher returns over time, thus protecting against market volatility and addressing the risk of rising rates up to a certain point. .

This strategy works for a basic reason, companies that are capable of increasing their dividends over time they boast a higher quality than the general market in terms of the quality of their benefits and leverage. The reason is that when a company has the ability to increase its dividends reliably for years or even decades, it implies soundness in its financial statements.

That strength of its fundamentals in dividend growth values ​​mean they can provide some protection against downturns during bear markets..

There is another side to the coin. With the pressure on business results derived from the crisis, it is possible that companies with high returns on their dividends without strong financial strength and discipline cannot sustain future payments and could be prone to dividend cuts and suspensions.

Consequently, large dividend payers with more financial leverage, lower profitability, and lower earnings growth may be more likely to cut their dividends in a volatile market and low growth. In 2020, dividend cuts accumulated in the global economic recession triggered by COVID-19. Historically, a similar trend was observed during the 2008 financial crisis.

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At this point we must be able to differentiate the dividends that correspond to a trajectory against new or troubled companies trying to attract market participants by borrowing only to pay shareholders. They try to maintain a virtually high price by deteriorating their balance sheet, and overnight when their situation is unsustainable, they crash into the market.

Europe’s generosity with the dividend

In the period from 1971 to 2016, the contribution of dividends to the annualized total return of the portfolio for the MSCI Europe index was approximately 38%.

Other regions, such as North America (MSCI North America Index) and Asia-Pacific (MSCI Pacific Index), around one third of overall returns were determined by dividends.

The European companies, in particular, have an investor-friendly dividend policy compared to their international peers. The dividend yield of the MSCI USA index looks positively modest in comparison, although it should be noted that US companies, unlike European ones, for example, have a stronger tendency to launch share buyback schemes than to pay dividends. .

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If we focus on companies in the euro countries, Spain, Portugal and Italy are leading the dividend yield, which can be explained by the fact that these markets still have low valuations.


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