Once again, the high price for assured growth in the current environment is evident and a key valuation dilemma for investors is highlighted.
Global dividends rose 2.3% year on year on a headline basis in the third quarter, with an overall payout of $297.0bn, an increase of $6.8bn. Currency factors have played a huge role and underlying growth (which strips out exchange rate movements and other factors) was 9% – in line with the first half of the year.
However, there was vastly different performance from country to country. Much of the overall rise was attributable to the rapid growth in the US and a one-off special dividend from Kraft’s merger with Heinz. US companies grew their dividends at ‘an astonishing pace’, according to Henderson, with almost every sector increasing distributions (the exceptions were mining and tobacco). Underlying growth in dividends was 10%, the seventh consecutive quarter of double digit increases.
While this growth is attractive in the current climate, the starting yield on US companies is anaemic. The current yield on the S&P 500 index is just 1.91%. The picture for dividends in the UK, where there is a marked difference between high yield large caps with little growth and low yielding mid-caps with high growth, is reflected across the globe as growth in dividends globally comes at an increasingly high price.
Emerging markets were notable laggards for the quarter, with dividends from China set to fall in 2015 for the first year on record. They are currently down 2.1% year on year. Henderson blamed the impact of the economic slowdown on profits and payouts. This was not confined to the industrial parts of the economy, where weakness might be expected as the country transitions to a new economic model, but extended to areas such as the banks: the China Construction Bank, for example, made its smallest increase in years, while China Citic Bank cancelled its distribution altogether. The weakness rippled out across Asia-Pacific ex-Japan, though currency was the major factor elsewhere.
Yet the starting yield is notably far more attractive in these countries. The FTSE Emerging Market All cap index has a starting yield of 3.1%, while the FTSE Asia Pacific ex Japan sits at 3.2%. The most attractive yields in wider emerging markets are to be found in Eastern Europe, where the FTSE Emerging Europe yields 4.3%.