Are Investors Missing The Boat On Global Dividends?

Global dividends were up 10.2 percent in the first quarter of 2018, according to the Janus Henderson Global Dividend Index, reaching an all-time high of $244.7 billion in payouts.

Historically, dividends have been responsible for about 44 percent of the S&P 500’s returns over the past 80 years.

With those figures in mind, some money managers wonder why investors aren’t more focused on dividend stocks, given the favorable short- and long-term market conditions.

“Ultimately all investors should be focused on dividends as current and future dividends determine the value of stocks,” said Jay Hatfield, president of Infrastructure Capital Advisors and portfolio manager of the InfraCap Active MLP, an exchange-traded fund.

More mature growth companies that are fully taxable have been increasing dividends this year as they benefit from lower tax rates, particularly in the U.S, Hatfield said.

“Lower U.S. tax rates are fueling higher gross domestic product growth rates in the U.S. and to a lesser degree, overseas,” he noted. “Yet, higher growth is benefiting early stage growth companies and the mid-stage growth companies, which also pay dividends.”

Global dividend yields have risen substantially in recent months, Wall Street insiders say. It’s a trend that should continue.

“Most of this dividend growth is coming from the re-acceleration of global economic and corporate profit growth – more cash for companies allowing them raise shareholder dividends,” said James Demmert, founder and managing partner at Main Street Research in Sausalito, Calif.

‘Don’t Be Fooled’

Investors should seek attractive dividend stocks with a few caveats in mind to manage risk, Demmert said.

“Don’t be fooled by high yield alone,” he said. “Stocks that have higher-than-average dividend yields often are signs of a troubled company.”

General Electric is a good example, he added. The troubled company’s stock fell precipitously from a high of 33 to a low of 12 over the past year.

“When stock prices fall dramatically, yields temporarily increase above average and can enticing for unaware investors, which leads to trouble – a further decline in stock value, or a cut in the dividend -- as was the case with GE,” Demmert said.

When seeking dividend-paying stocks, experts advise making sure that the company is on solid financial footing and has a history of increasing their dividends annually.

“Look for great dividend-paying companies in recovering sectors,” Demmert said. “We believe that the energy sector is a great example of this theme. The recovery in oil prices is making energy companies much more profitable.”

He points to U.S.-based Chevron (yield 3.3 percent), France-based Total (yield 3.7 percent), and U.K.-based Royal Dutch (yield 3.7 percent) as good examples.

Looking For ‘Ruler Stocks’

Another goal when hunting for good dividend stocks is to seek out companies that look to be well-positioned to continue those payouts in the future, said Robert R. Johnson, principal at the Fed Policy Investment Research Group in Charlottesville, Va.

“Some pundits refer to these as ‘ruler stocks’ because if you laid down a ruler on a graph of dividends over time, the ruler would point to the northeast and most of the points would be very close to the ruler,” Johnson explained.

Others refer to these stocks as “dividend kings.” Two prime examples are Johnson and Johnson (JNJ) and Genuine Parts Corporation (GPC).”

A word of caution on global dividend stocks: they do carry additional interest rate risk, Hatfield said. But there is a workaround for dividend investors.

“Smart investors are gravitating toward dividend-growth stocks and early stage growth companies to benefit from improved global growth prospects and avoid interest rate risks,” he noted.

Another disadvantage of dividend-paying stocks over non-dividend paying stocks involves the taxability of dividends.

“If you don’t need current income, you may want to invest in non-dividend paying growth stocks or companies who don’t pay a dividend like Berkshire Hathaway,” Johnson said.

But for the long-term investor, the benefits of dividend-paying stocks over bonds are dramatic, Johnson added.

“An investor can put together a portfolio of dividend-paying stocks that’s yield compares favorably with the yield on Treasury securities,” he said. “The difference is that over the long run, dividends on stocks grow and the stock price advances. When one locks in a yield on government securities, it’s static over the holding period.

“In other words, there is substantial upside with dividend-paying stocks.”

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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