In the international markets, dividends become even more relevant. In some developed European markets, for example, nearly 100% of total returns have come from dividends because changes in equity valuation have been minimal to slightly negative, according to research by GMO, a privately held global investment management firm.7 Businesses with strong dividend policies become more prevalent as a consequence which makes the universe of high dividend yielding stocks even broader outside U.S. borders. For example, while there were 129 U.S. stocks with a dividend yields greater than 5% as of 6/30/12, there were 996 non-U.S. stocks that met that criteria, according to Morningstar.8
Examining the stocks by global regions, many offered dividend yields higher than those available in the U.S. as of 6/30/12. In fact, the average dividend yield of developed Europe is more than double the average dividend yield of North America.
Taking a global approach to selecting the best dividend paying stocks adds global diversification and can add sector diversification as well. As shown in the chart below, many of the highest-yielding U.S. stocks tend to be concentrated in a few sectors, such as utilities and telecommunications. Conversely, other sectors in other regions deliver high yields, such as financials in developed Europe and information technology in emerging Europe. Conversely, other sectors in other regions deliver high yields, such as financials in developed Europe and information technology in Latin America.
Overall, investors taking a more global approach to creating dividend income in their portfolio have many more options to consider and have the added benefit of both global and sector diversification. No single region can contribute strong equity returns at all times. Flexibility to select high-dividend paying stocks from around the globe can help protect against secular slowdowns.
But What About Short-term Volatility?
The one downside to a high dividend yield equity portfolio is short-term price volatility. But stock price volatility little impacts the dividend stream paid to you, since firms follow a stable or growing dollar dividend policy and very infrequently reduce dividends, as discussed earlier. In addition, the short term volatility disappears as downward price movements are more than offset by upward price movements over time. Thus principle grows over the long run.
Conclusion
A high dividend yield equity portfolio can produce 2 to 3 times the income per dollar invested in comparison to a traditional low risk bond portfolio. So less of the portfolio needs to be dedicated to income generation. And, as dividends grow over time, so does the principle, even if all dividends are paid out and not reinvested. Investors taking a global approach to investing in dividend-paying stocks have many more options to consider with many of the highest-yielding stocks beyond the U.S borders. They also benefit from global and sector diversification. While a high dividend yield equity portfolio experiences higher short-term volatility, much like the stock market, that volatility has little impact to the dividend stream. It is important to get past the emotions of short-term volatility in order to reap the benefits of a high dividend yield portfolio for generating retirement income. At almost every level, such a portfolio provides a competitive retirement income solution.
1 Our research, as well as actual portfolio management experience, confirms such a rate is achievable and sustainable by investing in a diversified portfolio of high yield US equities.
2 “Do Changes in Dividends Signal the Future or the Past?” by Sholomo Benartzi, Roni Michaely, and Richard Thaler, The Journal of Finance, July 1997.
3 See “Surprise! Higher Dividends = Higher Earnings Growth” by Rob Arnott and Cliff Asness in the Financial Analyst Journal, Jan-Feb 2003, and “On the Importance of Measuring Payout Yield”by Jacob Boudoukh, et al., The Journal of Finance, April 2007.
4 See “Do dividends signal information about future earnings?”,by Khaled Hussainey, Applied Economics Letters, 2009.
5 Since 1950 the US stock market return has average closer to 11% annually, so 10% is a somewhat conservative estimate.
6 Fred Alger Management, Inc. White Paper, Home Country Bias Reduces Investors’ Opportunity Set, 2013.
7 Based on research published by GMO.
8 DWS Investments White Paper, Dividends: The Case for income-Oriented Investors, August, 2012
This article was written by C. Thomas Howard, PhD, Professor Emeritus of Daniels College of Business, University of Denver, CEO of AthenaInvest Advisors and Portfolio Manager of AdvisorShares Athena High Dividend ETF (DIVI).