Dividend Stocks Can Be Compelling Internationally, Too

Global Growth Stuck in Slow

Examining the rolling real GDP growth of the United Kingdom and Germany for the past 47 years, a trend line pointed directly to where we are today — at roughly 2% real growth, down from a starting point of 4% in 1969. We see similar trends across Asia and the U.S. With the exceptions of Australia and South Korea, the International Monetary Fund forecasts growth of approximately 2% for Europe, the U.S. and most of Asia — for the next several years.

Productivity, a key driver of GDP as well as company earnings, is low and holding back growth. In a low-growth environment, when uncertainty about the future increases, companies often refrain from substantial capital investments in technology and other drivers of productivity growth. Add in global political uncertainty, destabilized trade policies and increasing regulation, and there is no catalyst on the horizon to change the 2% trend. If this becomes a headwind for future equity performance, the importance of dividends will become even more pronounced.

Spotting Dividend Achievers and Avoiding Deceivers

Dividend-paying stocks carry specific risks. Investors must tread carefully. High dividends may have resulted from stock sell-offs, or a company’s situation may have deteriorated due to sector- or company-specific reasons. In these cases, companies often cannot sustain high dividends and will be forced to cut them — a bearish signal always punished by markets. By following these criteria, investors can benefit from dividend investing without taking on additional risk:

Sound Financial Health: Buy stocks with high sustainable dividends they can continue to pay because they have the cash flow. Usually conservatively run, these companies can lead to strong, long-term capital appreciation. Commitments to pay high percentages of earnings in dividends often prevent companies from undertaking value-destructive activities.

Return Stability: Lower-volatility stocks with reduced exposure to economic cycles can deliver more stable returns, over time, and less downside risk.

Attractive Fundamentals: Companies that are more attractively valued than their competitors judging by balance sheets and cash flow statements, combined with a sentiment catalyst such as faster growing earnings or higher earnings estimates, provide potential for outperformance. 

Done right, dividend investing can be a low-risk way to potentially increase the certainty of outcomes in a low-growth world. Investors should pick stocks that provide sustainable, growing dividends — dividend achievers — while avoiding dividend deceivers with high dividends that look attractive, but do not have the strength to sustain payouts, and only add risk to a portfolio.