Inflation busting

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  By Guest Blogger Doug Rowat

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Ah, dividends.

The least sexy part of finance.

Netflix with all its spectacular gains this year? No dividend. Amazon? Same, no divvy. Coinbase Global? No divvy. Nvidia? Technically yes, but so small that no one cares. Even Warren Buffett’s Berkshire Hathaway? No divvy. You get the idea. Dividends are boring.

But for investors seeking reduced volatility and regular income—with dividend growth-rates that will almost certainly vastly eclipse inflation over the long term—dividend-paying equities can’t be beat.

First, how much collectively gets forked over to investors by corporations each year? According to investment manager Janus Henderson, which researches this subject annually, global dividend payouts rose 5% last year to a record US$1.66 trillion. To put this in perspective, corporations distributed to investors last year almost the equivalent of the entire Canadian economy.

The dividend growth was also broad-based with 86% of companies either raising dividends or, at the very least, holding them steady. The importance of having a global portfolio was also highlighted by the almost 18% y-o-y dividend growth rate for European equities.

Dividends aren’t assured to rise every year, of course, but they nearly always do. And the post-Covid trend is particularly impressive:

Global total annual dividends (US$ billions)

Source: Janus Henderson

We’ve frequently highlighted the high correlation between corporate earnings and market direction, but there’s a similarly high correlation with dividends. A corporation that’s raising its dividend is likely a healthy corporation, which naturally attracts investor interest. And it goes without saying that steadily offering investors more money draws buying interest as well.

The 25-year correlation between dividends and equity market direction is almost 90% (see chart below) and the 25-year annualized dividend growth rate for global equities is almost 6%. The inflation rate in Canada has averaged 2.2% over the past 25 years. (You can play around with the inflation numbers here: https://www.bankofcanada.ca/rates/related/inflation-calculator/.) So, a globally diversified equity portfolio (diversified, naturally, through ETFs) is likely to offer dividend growth that will more than double our country’s inflation rate over the long term. Dividend-paying equities therefore are near-perfect inflation beaters.

MSCI World Index vs dividend payments – long term

Source: Turner Investments, Bloomberg

Finally, a word on Canadian dividends. The S&P/TSX Composite has modestly outperformed global equities over the past 25 years (a 7.5% annualized total-return gain versus a 6.6% gain on the same basis). Canada certainly lacks exposure to several high-flying sectors, including information technology, so much of this outperformance is a result of our market’s superior dividend payouts. Not only is our yield significantly higher than the rest of the world’s (see chart below), but our dividend growth rate is much higher also. Thank our railway-, pipeline- and financial-sector stocks for that. Layer on our country’s beneficial dividend tax credit and dividend investors will keep FAR more of what they earn after taxes than investors earning, say, interest income.

S&P/TSX Composite dividends vs MSCI World dividends

Source: Turner Investments, Bloomberg

However, whether they’re Canada focused or globally focused, every single one of the equity ETFs in our clients’ portfolios feature a consistently growing dividend payout.

Now you know why.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.

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About the picture: “This suspicious-looking fellow is quite obviously named Tiger,” writes John.  “He is currently a resident at Shelter for Lombok Dogs, near Kuta, Lombok (Indonesia) where I volunteered for 8 days in May. In 2022, the Canadian Food Inspection Agency banned the importation of dogs intended for the “commercial dog trade,” which includes adoption, due to two rabies infection incidents. Despite there being better options to manage the risk than an outright ban, the ban remains in place. The greatest demand for adoption are smaller dogs (think Tiger’s size and below), but Canada does not have many strays of this size. This has resulted in a boon for backyard breeders and puppy mills. And sadly, this also reduces the chance that dogs like Tiger will ever have a shot at a better life. Lombok is one of several Indonesian islands that is rabies-free.”

To be in touch or send a picture of your beast, email to ‘[email protected]’.