Markets have started the year in skittish fashion. Fears about emerging inflation in the U.S. and elsewhere has focused investor attention on the 10-year Treasury yield, the so called "risk free" rate of return. As it flirts with the 3 percent level investors are reviewing the relative return that can be wrung from equities before the year is out. Can they beat this "risk-free" rate by owning stocks?
Which begs a further question, with the world's major central banks still sitting on policy rates sub-2 percent, why are investors not more interested in good dividend paying equities? The opportunity to participate in some equity-like capital gains with the benefit of inflation beating 5-6 percent dividend yields should be attractive as a core portfolio holding. Even more so if traditional core bond holdings are vulnerable to a sell-off in fixed income markets spooked by inflation.
But investors are wary about strong dividend payers because they fear the payouts are not sustainable. And recent history has fueled that prejudice. The banks were traditionally among the strongest yielding stocks but that income stream stopped immediately with the global financial crisis. Other companies with liquidity issues also suspended their dividend programs. While fear of the recent past may have dampened enthusiasm for this style of investing — in reality the opportunity for income investors is only growing.
Global dividends broke new records in 2017, according to asset management group Janus Henderson, and at this run rate will probably rise again in 2018. At a headline level dividends were up 7.7 percent. That is the fastest since 2014 and hit $1.252 trillion last year. What was the reason for this corporate generosity? Janus Henderson cites a combination of higher economic growth and rising corporate confidence. "While equity markets have been volatile recently, dividend payments are reflective of corporate health and economic conditions and we expect them to be much more stable." says Ben Lofthouse, director of global equity income at Janus Henderson.