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Stock market volatility and historically low interest rates over the past several years has brought renewed attention to the importance of dividends. Interest has been bolstered by research showing that reinvested dividends have accounted for 40–60% of total return in every major equity market over every 10-year period since 1900, according to Credit Suisse. At the same time, the reluctance of some investors to re-enter the stock market since the financial crisis of 2008 has kept stock prices from rising as rapidly as earnings, and this has, in many cases, boosted dividend yields.
Source: FactSet and MSCI. Dividend yield by country, calculated using the weighted averages of stocks in the MSCI All Country World Index.
But as attractive as U.S. dividend yields are, those in many overseas markets hold even more appeal. On average, non-U.S. dividend yields have been significantly higher. Companies in foreign markets have long paid higher dividends than U.S. companies, and, historically, they have made a greater commitment to dividend payments, averaging a payout ratio of nearly 48%. In contrast, U.S. companies average less than one-third.
Source: BofA Merrill Lynch, MSCI, and MSCI All Country World Index ex U.S. Dividend payout ratio (DPR) is calculated as dividends per share divided by earnings per share.
In some corners of international markets, yields may be anomalous, signaling unusual opportunities. For example, in some rare cases, a solid company can offer a dividend yield that is higher than its price-to-earnings ratio. In other cases, some companies pay dividend yields that are greater than the yields on their debt. While such high yields can signal that a company is in distress, diligent research, including interviews with management, has helped to distinguish whether that distress is temporary or permanent. Companies such as these, therefore, offer not only the potential for attractive income but also the possibility of price appreciation.
While dividends are an important part of any diversified portfolio, in today's low-yielding but inflation-wary environment, they are even more compelling, according to Vincent McBride, Lord Abbett Partner & Director of International Equity. "With the sharp drop in government and corporate bond yields that has occurred worldwide, the spread between non-U.S. dividend yields and bond yields has widened substantially," said McBride. "And an increase in inflation expectations has historically been better absorbed by equities than by fixed income."
IMPORTANT INFORMATION
All links are directed to Lord Abbett's website.
The historical data are for illustrative purposes only, do not represent the performance of any Lord Abbett mutual fund or any particular investment, and are not intended to predict or depict future results. Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment. Investors may experience different results. Due to market volatility, the market may not perform in a similar manner in the future. Dividends are not guaranteed and may be increased, decreased, or suspended altogether at the discretion of the issuing company.
Past performance is no guarantee of future results. Current performance may be higher or lower than the performance data quoted. All indexes are unmanaged and do not reflect reinvestment of dividends and distributions, deduction of management fees, or operating expenses. An investor cannot invest directly in an index.
Investors should consult with a financial advisor on the strategy best for them based on their individual goals, risk tolerance, and investing time horizon.
Neither diversification nor asset allocation can guarantee a profit or protect against loss in declining markets.
A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. The value of investments in fixed-income securities will change as interest rates fluctuate. As interest rates fall, the prices of debt securities tend to rise, and as interest rates rise, the prices of debt securities tend to fall. Investments in high-yield securities (sometimes called junk bonds) carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Income from municipal securities may be subject to the alternative minimum tax. Federal, state, and local taxes may apply. There is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-exempt income. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. No investing strategy can overcome all market volatility or guarantee future results.
Foreign securities generally pose greater risk than domestic securities, including greater price fluctuations and higher transaction costs. Foreign investments also may be affected by changes in currency rates or currency controls. With respect to certain foreign countries, there is a possibility of nationalization, expropriation, or confiscatory taxation, imposition of withholding or other taxes, and political or social instability that could affect investments in those countries. The securities markets of emerging countries tend to be less liquid, to be especially subject to greater price volatility, to have a smaller market capitalization, and to have less government regulation, and may not be subject to as extensive and frequent accounting, financial, and other reporting requirements as securities issued in more developed countries. Further, investing in the securities of issuers located in certain emerging countries may present a greater risk of loss resulting from problems in security registration and custody or substantial economic or political disruptions. Foreign currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by supply and demand in the foreign exchange markets and relative merits of investments in different countries, actual or perceived changes in interest rates, and other complex factors. Currency exchange rates also can be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments or central banks, or by currency controls or political developments.
While municipal bonds are backed by municipalities, U.S. government securities, such as U.S. Treasury bills, are considered less risky since they are backed by the U.S. government. High-yielding, non-investment-grade bonds (junk bonds) involve higher risk than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principal on these securities.
Although U.S. government securities are guaranteed as to payments of interest and principal, their market prices are not guaranteed and will fluctuate in response to market movements.
Dividend yield is calculated by dividing annual dividends per share by the share price of a stock.
Price-to-earnings ratio is the price of a stock divided by its earnings per share.
Standard Deviation is a statistical measurement of the range of a fund's total returns. In general, a higher standard deviation means greater volatility.
Current yield is calculated by dividing annual investment income by the current price of an asset.
Taxable equivalent yield is the pretax yield that a taxable bond needs to possess for its yield to be equal to that of a tax-free municipal bond. It does not reflect state and local income taxes or the alternative minimum tax, if any and will vary based on each investor's tax bracket.
The credit quality ratings of the securities in a portfolio are assigned by a nationally recognized statistical rating organization (NRSRO), such as Standard & Poor's, Moody's, or Fitch, as an indication of an issuer's creditworthiness. Ratings range from AAA (highest) to D (lowest). Bonds rated BBB or above are considered investment grade. Credit ratings BB and below are lower-rated securities (junk bonds). High-yielding, non-investment-grade bonds (junk bonds) involve higher risks than investment-grade bonds. Adverse conditions may affect the issuer's ability to pay interest and principal on these securities. Credit quality distributions breakdown is not an S&P credit rating or an opinion of S&P as to the creditworthiness of the portfolio.
The S&P 500® Index is a market capitalization-weighted index of common stocks.
The S&P 500® Index Excluding Financials is a subset of the S&P 500 Index that excludes the financial sector.
The opinions in Market View are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy, and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.
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