Investing for dividend return has long been considered a solid, if a bit stodgy, investment strategy. Stocks that pay dividends are typically a part of a total return investment strategy as reinvesting dividends enhances returns. However, the reality is dividends have been heading downward for a couple of decades until a recent bounce back.
Portfolio manager Mebane Faber suggests that considering what he calls shareholder yield is a advantageous way to compare stocks. Shareholder yield is a broad term including dividends, buybacks and other ways that management of a public enterprise can use to increase shareholder value. In his book, Shareholder Yield: A Better Approach to Dividend Investing, Faber explains an investor buying stocks screened using his shareholder yield method would have significantly outperformed that of an investor following dividend-only strategies.
Dividends catch up
Citi Research’s team of Buckland et al. suggests that the recent relatively rapid rise in dividends across global equities is because dividends are in a catch-up mode based on the 40% run up in equity markets since 2011.
The analysts also point out the apparent conundrum that this increase in equity prices and dividend payouts has occurred in a period of little to no earnings growth. They explain this potentially worrisome comparison as catch up and “re-rating” from a double-dip recession that was anticipated but never materialized. They also note that although the global P/E ratio has ballooned from 12X in 2000 to 17X in late 2013, a 12x global P/E is historically quite low, and that a 17X P/E is actually close to the historical median.
The bottom line is Citi’s team thinks there is more room to run, both for global equities and in terms of continued increases in dividend rates. They argue that although this secular bull market might be getting long in the tooth, it’s not done running yet, and they anticipate around a 13% gain in the MSCI ACWI benchmark by the end of 2014.