Divide and Rule!

Dave Rundle takes a long-term view of companies that pay dividends

Market volatility is again on the increase as Sovereign Debt issues resurface and although we have seen this movie before, I think we will continue to see re-runs for a while yet. Unfortunately, making money in this low interest rate environment requires some risk taking.

I went to a very interesting presentation the other day by the offshore manager of an Equity Income Fund. The core of his presentation was that shares paying dividends have tended to be good defence plays, especially in times of volatility.  This is because dividends offer an income stream that may be attractive relative to other options - such as fixed income rates. It is a fact that companies who pay dividends typically have better business models, stronger balance sheets and a higher degree of confidence in their secular growth capabilities. And research shows that in a bear market stocks that pay dividends have gone down, on average, about half as much as those that do not.

Earnings reports are also showing that companies are in good shape with decent cash flows and recently we have seen companies returning capital to shareholders through both dividends and buy-back programs. Spare cash has been used to lower debt levels and companies have become much leaner and more efficient than in the past – a trend I believe will continue.

Although dividend payout is a function of earnings growth, the strength of the balance sheet and the current payout level are two other important factors. Most managers seeing moderating growth in earnings are finding balance sheets that are cash rich and stronger than ever. But investors must also be wary of buying companies with the highest dividend yield. They could be paying out an unsustainably high level of earnings as dividends, or it can indicate the company has little prospect for future growth. Dividend yield alone is no indicator of dividend health, and is why extensive fundamental research is the best way to approach equity markets.

According to the presentation, dividend yield and dividend growth have accounted for over 90% of long-term returns so clearly dividends matter. But if your investment horizon is less than two years, rather stay in cash.


This article is solely intended to provide you with objective information about financial products and services and is not intended to constitute a recommendation, guidance or proposal with regard to the suitability of any product in respect of any financial need you may have.

Dave Rundle 083 658 8055
Rundle Management Services