The Week: Global dividend growth slips as corporate profits dip

The deceleration in the global economy is making an impact on global dividends, finds the latest Henderson Global Dividend Index. However, dividend seekers don’t need to panic yet; there are still plenty of places around the globe where it is possible to achieve fast-growing income but investors need to be more discerning.

  • The index showed growth of 1.1% in global dividends, the slowest for more that two years.
  • The weak spots were Europe ex UK, where dividends dropped 5.3% and Asia Pacific, where dividends fell 2.9%.
  • Henderson still predicts 5.5% underlying growth in global dividends for the year ahead.

The index showed growth of just 1.1%, the slowest for more that two years as the strong Dollar weighed on returns. Underlying growth - taking out the impact of currency - was a relatively robust 4.6%, but some major stock markets, notably the US and Europe ex UK, were lacklustre.

There was notably disparity in different regions. Emerging markets recorded growth of 12.6% over the second quarter of 2019. This was on the back of 19% growth in Q2 2018 and 18% growth in 2017. The asset class is motoring, as the dividend culture spreads and countries improve corporate governance.

The weak spots were Europe ex UK, where dividends dropped 5.3% and Asia Pacific, where dividends fell 2.9%. Even the UK and Japan managed a stronger performance. Partly, this was a function of the stronger Dollar (though this wasn’t the case in Japan). In Europe, where dividends are more closely correlated to profits than elsewhere around the globe, softening profits growth showed up quickly. 

Asia Pacific reflected the weakness of China. A quarter of Hong Kong companies cut their dividends over the second quarter, far higher than in any other major market. The weakness of China Mobile had the strong impact on the aggregate figures, but countries such as South Korea also struggled. 

Sectors also made a difference. Interestingly, it was the sectors that saw the strongest share price performance that saw the weakest dividend performance. Dividends from financials and energy stocks saw the fastest increase, while technology and consumer basics lagged. 

This plays into the value versus growth question. Value companies are at their cheapest level relative to growth companies in decades. Many value managers argue that value companies are outpacing growth companies on fundamentals as well, making the investment case even more compelling. The Dividend index seems to support that argument. Ostensibly ‘cyclical’ stocks are seeing stronger dividend growth than more traditional growth companies. 

As with much of the rest of the global economy, it could go either way. The Dividend Index isn’t suggesting a major slowdown, and Henderson isn’t making any changes to its forecasts. It still sees 5.5% underlying growth in global dividends for the year ahead. However, notable risks loom.

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