A possible strike against the high dividend theme is that it is seen as a defensive strategy and an underperformer in times of rising rates and growing economy. Is it always the case? Let’s debunk the myths about high-dividend stocks.
Myth 1: Higher rates = Pressure on dividend-paying stocks?
- First, higher rates are usually a sign of stronger growth as central banks no longer see the need to support the economy with low rates and easy liquidity. In most cases, equities benefit from a stronger economy.
- Second, high-dividend stocks do not necessarily see underperformance during times of rising rates. During periods of rising US yields, the average three-month total return of several high dividend indices including the MSCI Emerging Markets (EM) High Dividend Index and the MSCI AC Asia Pacific (ex-Japan) High Dividend Index still managed to outperform their broad index counterparts1.
1Source: FactSet, MSCI, J.P. Morgan Asset Management. Annualised average of rolling three-month total return (USD) from 1998-2018. Data as of 31.05.2018. Trigger to count returns is if the 10-year yield rose more than 25bps in prior 3 months. Past performance is not a reliable indicator of current and future results.
Myth 2: High-quality dividend stocks = Defensive?
- If we take a closer look at the components of MSCI AC World High Dividend Index, the answer is that cyclical stocks have a larger weighting than defensive stocks; and even more so in the MSCI EM High Dividend index, which only sees 23% from defensives but 45% from cyclicals.
- Given the large cyclical weighting, high-dividend strategies can still be expected to take advantage of greater price appreciation in the current economic stage of rising growth and slowly rising rates.
Large cyclical weighting in high dividend indices
Source: MSCI, J.P. Morgan Asset Management. *GICS sectors classified as Defensives are Telecommunication Services, Consumer Staples, Utilities, Health Care and Real Estate. **GICS sectors classified as Cyclicals are Materials, Energy, Industrials, Information Technology and Consumer Discretionary. Data are as of 31/05/2018.
Myth 3: Dividend culture in Asia = Not well established?
- NO. Asia Pacific (ex-Japan) has much to offer when it comes to dividend paying stocks, compared to the rest of the world. As of end-May 2018, there were 289 stocks in the MSCI Asia Pacific (ex-Japan) Index with dividend yield of more than 3%, compared with 209 in MSCI Europe and 130 in MSCI US.
- Across Asia, there is also backing for the high dividend story with the benefit of improving corporate governance driving higher payout ratios.
Source: FactSet, MSCI, J.P. Morgan Asset Management. Guide to the Markets – Asia. Data reflect most recently available as of 31/05/2018.
Dividend is not guaranteed. Positive yield does not imply positive return.