TRACKERFUNDS THAT SCREEN FOR DIVIDENDS
Investors also have the option to seek income from international dividend payers through socalled ‘smart beta’ dividend-focused ETFs. These screen for the best dividend-paying companies, usually based on their track records of paying dividends, and also their up and down fortunes.
Options include the ProShares S&P 500 Aristocrats ETF, which has given investors a total return of 121.8% over the past decade. Meanwhile, the SSGA SPDR S&P Pan Asia Dividend Aristocrats ETF has returned investors
79.4%. SSGA SPDR S&P Euro Dividend Aristocrat has been less successful, having returned 66.7%.
In contrast, the average return over the same period from an active global income fund in the Investment Association global equity income sector has been 69.2%, while the average active fund in the IA’s UK equity income sector has returned 44.9%. Disappointingly, though, the SSGA SPDR S&P UK Dividend Aristocrats UCITS ETF returned just 14.7% over the decade, according to figures from FE Trustnet.
won per share in 2019. Nick Payne, head of global emerging market equities at Merian Global Investors, says: “We believe the firm’s luxury cosmetics portfolio can continue to grow in China to support future profit and dividend growth.” The company has high (4.7 times) dividend cover (see below).
flow of a company. He explains that where the former amounts to north of 75% of the latter, that is troubling, as it means there is little room for the dividend to grow.
The dividend cover score can be another red flag. This is calculated by dividing earnings per share by the dividend per share. A low dividend cover score – of around one times or lower – suggests that a dividend is vulnerable, as the company is using most, if not all, its profits to fund its dividends. A figure of two or more times is viewed as comfortable, because it is a sign that a business is not over-distributing.
SCOPE IN EMERGING MARKETS Hunting for dividends in emerging markets may seem a counterintuitive endeavour. Arguably, emerging market firms should be capitalising on growth in their domestic markets by reinvesting cash in order to expand. Nevertheless, some emerging market companies have become dividend heroes over the past decade – often banks.
HFDC Bank, a favourite among emerging market fund managers, has raised its dividend every year since 2006
OTHER RISKS There are other signs to watch out for. First, as the table shows, the yield for some companies is comparatively low. That in itself is not a bad thing, as a bank’s management team.”
He adds that the company’s healthy balance sheet and “extremely competent management team” make its dividend sustainable.
A favourite among emerging market and Indian fund managers is HFDC Bank. It’s is one of the most prominent in India and, according to Payne, markedly different from its developed market counterparts because of its “high profitability” and ability to “pay a rising dividend stream”.
Payne notes that, despite the fact that the company reinvests much of the cash it generates back into its business, the firm has still delivered continuous dividend growth every year since 2006.
Another emerging market dividend hero is Sberbank, a Russian bank. The company can often be found in emerging market fund portfolios. Negyal says: “It has paid an annual dividend for the past 10 years, but in the past five years there has been a much greater focus on dividends from the
Dividend-paying company heroes
Dividend yield (%) (five-year average)
LG Household and Healthcare
China Overseas Land Investment 2.9
Source: Refinitiv, as at 5 July 2019
Dividend growth rate (%) (five-year average)
Negyal is also positive about the dividend prospects for Itau Unibanco, a Brazilian bank. “We like the way the management team approaches the dividend payout: it thinks about the asset growth outlook together with capital requirements to drive sustainable dividend payments,” he says. “The bank’s strong balance sheet has allowed its dividends to grow at a doubledigit [annual] rate over the past five years.”
Payne likes China Overseas Land Investment. “This property developer, based in Hong Kong and China, has consistently grown its dividends. That’s very welcome, and a rare trait and discipline in an industry prone to boom and bust,” he says. Dividends grew from 0.049 HKD per share in 2003 to 0.87 HKD per share in 2018. The firm’s dividend cover is also high, at 3.85 times.
INVESTORS MUST WATCH OUT FOR CERTAIN RED FLAGS THAT INDICATE A DIVIDEND MAY BE VULNERABLE Stuart Rhodes Stuart Rhodes high yield often indicates risks and potential for a dividend cut. However, at the same time a low yield entails a lower return on investment. It could also mean that the company is very richly valued.
WATCH OUT FOR RED FLAGS Despite the enticing income opportunities available around the world and the diversification overseas firms add to portfolios, investors should exercise some caution.
A solid dividend history is a good indicator that a company’s dividend is sustainable, but it does not guarantee that the payout will be increased or maintained. Rhodes says investors must “watch out for certain red flags” that indicate a dividend may be vulnerable. A key red flag, he says, is the dividend compared with the operating cash
Secondly, currency differences are a risk that investors need to weigh up, particularly in relation to emerging market currency-denominated dividends, which are prone to rapid currency devaluations. If, for example, the rupee (India’s currency) were to be devalued, dividends paid out in rupees would buy fewer pounds when they were converted into sterling.
Thirdly, investing in individual company shares over pooled investment vehicles exposes investors to higher risk. A fund or investment trust is unlikely to see a huge capital loss, because it is relatively diversified. An individual share can lose substantial value, causing serious damage to an investor’s portfolio.
26 August 2019 | www.moneyobserver.com