Today’s equity markets are characterised by bouts of volatility, spurred by geopolitical tensions and macroeconomic uncertainties, mainly due to the start-stop nature of the US-initiated global trade war. This has investors seeking strategies that offer not only returns but also a certain degree of defensiveness. As a result, dividend investing, traditionally selected for its delivery of steady income, has re-entered the spotlight.
Positive long-run performance
An underappreciated characteristic of dividend investing, especially after the dominance of the technology sector of the past decade, is that historical performance data shows that dividend-focused portfolios have outperformed the broader market over the long run as above-average dividend yielders show better returns. Litzenberger and Ramaswamy (1979) were among the first to document the robust performance of high-yielding stocks. Jeremy Siegel’s work, The Future for Investors (2005), further demonstrated that the highest-yielding stocks in the U.S. market outperformed the broader market by a clear margin from 1958 to 2003. More recently, Morningstar’s 2022 study confirmed that high-yield portfolios have consistently outperformed non-paying and low yielding portfolios across regions.
Besides generating strong long term return, dividend strategies are typically more defensive. One of the reasons behind this phenomenon, we think, is that higher dividend-paying companies tend to be mature, cash-generative businesses. Investment needs are typically lower for mature businesses compared to higher-growth companies. This in turn leaves more room to distribute cash to shareholders, especially when balance sheets are strong. On top of that, high current free cash flow yields provide a margin of safety within valuations. These defensive characteristics make such companies particularly attractive in uncertain markets.
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Disclaimer
Van Lanschot Kempen Investment Management NV (VLK Investment Management) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.
Dividend Equities: general risks to take into account when investing in Dividend equity strategies. Please note that all investments are subject to market fluctuations. Investing in a Dividend Equity strategy may be subject to country risk and equity market risks, which could negatively affect the performance. Under unusual market conditions the specific risks can increase significantly. Potential Investors should be aware that changes in the actual and perceived fundamentals of a company may result in changes for the market value of the shares of such company.
For professional investors only. The value of your investment may fluctuate, past performance is no guarantee for the future. Do not take unnecessary risks. Before you invest, it is important that you are aware of and are informed about the characteristics and risks of investing. This information can be found in the available documents of the strategy and/or in the agreements that are part of the service you choose or have chosen.
