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Dividends to provide a welcome cushion for investors in an uncertain 2019, says new report

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Amidst an uncertain political backdrop, dividends look set to remain an important anchor for investors in 2019, according to new analysis by Allianz Global Investors, one of the world’s leading active investment managers.

Over the last 45 years, dividends have contributed to around 41 per cent of total returns on European equities since 1973.
 
The Dividend Report 2019 which analysed dividend yield data from leading markets from around the world has shown that European companies in particular, are proving especially “pay-out friendly” by international standards. At the end of 2018, in the 45 years from 1973, their dividend yield averaged around 3.8 per cent across the market in comparison to 3.2 per cent in North America and 2.0 per cent in Asia Pacific. In Europe in 2018, the European Monetary Union average dividend yield was 3.25 per cent and the UK came in at 4.97 per cent.
 
In 2019, AllianzGI experts expect that companies in the MSCI Europe will pay dividends of around 350 billion euros, meaning that European companies would once again pay out record amounts to their shareholders, around EUR16 billion (4.8 per cent) more than in 2018.
 
But the report also shows that it is not only dividends that provide more stability in equity investments. High-dividend stocks seem to develop in a much less volatile manner than those of companies with lower dividend payments. In particular, the volatility of US companies paying dividends is significantly lower compared to companies without dividend pay-outs and a similar trend has been emerging for European dividend stocks since the 1990’s.
 
However, as the European economy threatens to weaken there is also uncertainty regarding tougher global trading conditions which are likely to further spill over into European equity markets.
 
The level of pay-outs is not the sole deciding factor in the fund manager’s selection of stocks. Jörg de Vries-Hippen (pictured), CIO Equity Europe, says: “As active managers, we take advantage of downturns in the market as opportunities to buy in order to further expand promising portfolio positions. For us, continuity in dividend payments is just as important as their relative level, because a positive combination indicates a healthy basis. Such companies often prove to be stable anchors in turbulent times.”
 
There are currently some companies in the market with well-funded dividend payments and growth potential, even at discount prices. In this respect, there is a big focus on the European energy sector, as the massive restructuring of the sector should pay off in the foreseeable future in the form of stronger cash generation and dividends. De Vries-Hippen has considered companies in the insurance sector to be “classic dividend payers” for many years.
 
De Vries-Hippen adds: “We expect economic growth in Europe of around 1.5  per cent in 2019. But as the global liquidity valves close, the pressure will increase. A slowdown in the economy not only affects highly indebted countries such as Italy but reliable EU engines such as France and Germany also increasingly stutter in the face of growing domestic unrest and international disputes. The EU is vulnerable and the ups and downs of European equity markets will also depend on how Brexit finally plays out.”
 
Hans-Jörg Naumer, Head of Capital Market Analysis (co-author of the study), says: “Dividend pay-outs act as an airbag in an investor’s portfolio, which can have a particularly beneficial effect given unfavourable market conditions recently, as we’ve seen in Europe. We’ve seen that dividends stabilise a portfolio because they cushion price setbacks and generate predictable income.”
 

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