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Dividend equities may play an important role in portfolios as investors navigate a more challenging market environment marked by slowing growth, higher interest rates, and elevated geopolitical risks.

The case for global dividend equities

As we enter a more challenging market environment marked by stickier inflation, higher-for-longer interest rates, elevated equity valuations and rising geopolitical risks, dividend equities could play a more important role in portfolios.

1. Relatively attractive valuations
The rally over the past year has been concentrated among low or no-dividend-yielding companies, leading to a dispersion in valuations between companies that pay dividends and those that do not or pay very little. A broadening market could help narrow the spread, working to benefit dividend equities. Even among mega-cap tech companies, some are beginning to initiate dividends and focus on cash generation as their business models mature, expanding the investable universe for those seeking equity income opportunities.

 
2. Peak interest rates tend to present a constructive backdrop for global dividend stocks
As the current monetary policy tightening cycle draws to a close, global dividend stocks may present an attractive opportunity. Looking back at the last four rate hike cycles, global dividend stocks recorded relatively robust performance in the 12 months after the last Federal Reserve (Fed) interest rate hike with a tighter dispersion of returns compared to other equity sectors.

 
3. Defensive assets to ride out uncertainty
This asset class’s resilience can be ascribed to its higher-quality characteristics. While not the only metric to assess quality, a long track record of healthy dividend payouts is typically a valuable barometer of stronger company fundamentals and a signal of a commitment to shareholder value.

The search for higher quality, attractively valued opportunities could be in favour as investors navigate a more challenging and uncertain macro backdrop. Stickier-than-expected inflation could keep interest rates higher for longer and over time. This could stall economic growth and present challenges for valuations and earnings. Combining both ‘quality’ and ‘value’, global dividend equities may present a useful option to ride out an environment of higher real rates and slowing economic growth.

4. Dividend growth momentum remains robust
Global dividend growth has proven more resilient than global earnings, recording an annual increase of 6% in 2023 versus -2% for global earnings¹. Low dividend payout ratios coupled with relatively robust earnings may continue to support dividend growth momentum, as many companies have yet to revise their dividend policies after cutting payouts significantly during the height of the COVID-19 crisis. In our view, we would need to observe a material weakening in earnings before dividends come under pressure.

 

Active and selective: Finding the sweet spot among dividend yielders, growers and compounders

Still, not all dividend stocks are created equal, and the challenge is separating the wheat from the chaff. We tend to observe a structural overvaluation of equities that either exhibit higher current dividend yields or faster near-term dividend growth, driven ostensibly by investor short-termism, or a general focus on short-term results at the expense of longer-term outcomes.

In our view, seeking opportunities that combine attractive dividend yield with sustainable dividend growth – also known as “compounders” – can be helpful in constructing a robust and durable portfolio of dividend equities.

Source: J.P. Morgan Asset Management. For illustrative purposes only.

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As of Aug 2024. This information is based on current market conditions, subject to change from time to time without prior notice. Provided to illustrate macro and asset class trends, not to be construed as research or investment advice. Investments are not similar or comparable to deposits. Investors should make independent evaluation and seek financial advice. Risk management does not imply elimination of risks. Forecasts/ Estimates may or may not come to pass.

Diversification does not guarantee investment return and does not eliminate the risk of loss. Yield is not guaranteed. Positive yield does not imply positive return.

1. Source: J.P. Morgan Asset Management. “2024 Outlook: Embrace the income(ing) Year.” Published January 2024.

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This is a sponsored article from J.P. Morgan Asset Management.