(Pictured: Andy Budden)
In a timely fund launch, Capital Group has introduced its ‘World Dividend Growers’ strategy to both retail and institutional investors in Australia, emphasising the need for yield investments for both short-term cyclical reasons and long-term demographic ones.
Investors have been focused on yield for the past several years because of record low interest rates in most countries. Australia is one of the few where rates may go lower before they normalize. At the same time, aging populations and the babyboomer bulge have prompted unprecedented interest in new retirement products and strategies.
Andy Budden, a Singapore-based senior vice president, said last week that investors needed to look beyond domestic fixed income allocations for diversification in their search for yield. Capital has identified companies which grow their dividends as generally providing superior long-term returns. From 1990 to 2014 “all dividend growers” have returned an average of 10.3 per cent a year versus a global universe return of 8.5 per cent, steady or unchanged dividend payers of 7.7 per cent and dividend cutters’ returns averaging 5.9 per cent.
Australian investors, especially retail investors, have recognized the attraction of divend-growing stocks but the Australian market is very concentrated, Budden said. For instance of the total dividends paid in 2014 by all ASX companies, 43 per cent came from the four banks and BHP.
“We are not saying you should replace those portfolios of Aussie stocks,” Budden said. “But you should complement this and also have some diversified fixed income.”
Dividend-growth stocks are not necessarily high yield. It’s the growth which is important. For instance, the largest chunk of Capital’s dividend growers’ portfolio is currently held in Europe. A large proportion is also in the US despite the fact that the US tends to be a lower-yielding market. It also has Asia Pacific and Japan in the portfolio.
The portfolio is also surprisingly diversified on a sector basis. Budden said that the IT sector was changing, with the change at Microsoft since 2011 when the board decided to better reward its long-term shareholders and subsequently doubling dividends.
“The range is surprisingly broad,” he said. “Many industrial companies have grown their dividends despite making acquisitions. The management of those companies have been good at picking off smaller competitors and realizing synergies and growth.”
Budden believes that the market for dividend growers is currently in a sweet spot, if you compare dividend growth with high-yield stocks. “This is a great time for stock pickers,” he said.
The Capital portfolio currently has 73 stocks from a universe of more than 8,000. It also has a low turnover of about 25-30 per cent a year.