15 Feb 2023
The current market dynamics are challenging, with interest rates rising sharply to counter decades-high inflation, set against a downbeat outlook for economic growth. Whatever the macro environment - positive or gloomy - investors need to find an optimal balance for their portfolios. We believe dividends are a critical ingredient in managing these dynamics. For context, since the turn of the century, dividends have represented just over half of the total return from an investment in global equities. Heading into a downturn, dividends are becoming an increasingly important driver of returns.
Figure 1: Dividends represents a significant portion of an investor’s total return
Past performance is not a reliable indicator of future results, losses may be made.
Source: Morningstar, as at 31 December 2022. Performance of the MSCI ACWI since 01 April 2007, aligning with inception of the Global Quality Dividend Growth fund. For further information on indices, please see the Important information section.
Returns are primarily driven by free cashflow growth, dividends and changes in valuations. We believe free cashflow is the primary driver of wealth creation, as dividends are merely a residual once all capital requirements are satisfied; dividends cannot increase without growing free cashflow. The extent to which a company can achieve free cashflow growth is driven by the proportion of cashflow reinvested and then the returns achieved on those decisions.
Therefore, we believe the ability to identify companies that effectively allocate and reinvest cashflow is paramount for active investors to deliver attractive total returns. Such companies are best positioned to provide their shareholders with both a growing dividend and capital growth. In order to identify firms that can deliver this over the long term, it is important to be disciplined in defining the high-quality credentials that set these businesses apart.
General risks. All investments carry the risk of capital loss. The value of investments, and any income generated from them, can fall as well as rise and will be affected by changes in interest rates, currency fluctuations, general market conditions and other political, social and economic developments, as well as by specific matters relating to the assets in which the investment strategy invests. If any currency differs from the investor’s home currency, returns may increase or decrease as a result of currency fluctuations. Past performance is not a reliable indicator of future results. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.