Why dividend investments?
Surprisingly few investors realise that dividends make up a very significant proportion of the long-term total return on equity investments, especially if they are regularly reinvested. Depending on the market and time period, this has accounted for between 30% and 50% in the past, and even 70% in some decades! Note: At this point, it should of course be noted that no reliable conclusions can be drawn about future performance from past returns.
This has not changed that much in recent decades - despite the spectacular price rises of many high-growth, but mostly low-dividend technology stocks.
What's more, today's low-dividend growth champions could even become tomorrow's or the day after tomorrow's dividend kings in some cases.
Equities not only offer income opportunities based on their performance, they can also distribute part of the company's profits - the dividend - to shareholders. This was particularly attractive in the low interest rate environment of the 2010s, as dividend yields were often far higher than the interest income from bonds.
Of course, equity-dividends and bond coupons are not the same thing, and equities cannot be compared 1:1 with bonds: Equities have higher risks, but also higher potential returns. Dividends can be reduced, cancelled or even increased at any time, whereas bond coupons cannot. And while it is certain at what price a bond will be repaid on maturity (provided the issuer does not go bankrupt), it is completely uncertain at what price an equity once acquired can later be sold again.
What are the advantages of dividends?
High-dividend equities are an attractive and interesting investment alternative for investors who want higher returns than bonds and are prepared to accept the associated and correspondingly higher risks (price fluctuations, possible capital losses), because:
Due to the compound interest effect, reinvested dividends offer the opportunity for considerable additional income in the long term compared to equities that do not pay dividends.
High-dividend equities also fluctuate less than equities of companies that do not pay dividends.
The distributions can also be seen as a kind of buffer in weak stock market phases.
High dividend yields therefore seem desirable. But anyone who believes that it is only about the amount of dividends is mistaken. The most important thing is whether a company can generate these dividends over the long term and continue to increase them, while still retaining enough capital in the company to secure its growth and market position.
Dividend equities score highly when it comes to inflation
The rise in bond yields in recent years has put them back into much stronger competition with dividend yields, but dividend equities still score highly when it comes to inflation. This is because, unlike fixed-interest bonds, equities can offer a kind of inflation protection with their dividends. Although this is not perfect, it is often surprisingly good.
Correct stock selection is crucial
However, this requires a good equity selection, especially a focus on high-quality, solid companies with a strong market position and good business models. This is because they can pass on any general price and cost increases to their customers, meaning that profits and dividends also grow in line with inflation. In recent years, it has even been observed that many company profits have risen faster than the general price level.
A prime example of this is successful investor Warren Buffet with his long-standing investment in Coca-Cola equities. He now receives almost 60% of the share purchase price at the time (1988) as dividends - every year, mind you! And the investment itself has multiplied since then. But as I said, the right choice of shares is crucial.
This is also the case with Raiffeisen-GlobalDividend-ESG-Aktien, which does things a little differently from many of its competitors and is aimed at investors who not only want to invest in companies with high dividend expectations, but also want to support responsible business practices.
Raiffeisen-GlobalDividend-ESG-Aktien
The investment focus of the equity fund is on high-dividend companies with medium and high market capitalisation (so-called mid and large caps), primarily from industrialised countries. However, investments in Emerging Market equities are also possible. Up to this point, this is something that many people do.
However, far fewer funds with a dividend focus invest sustainably according to ESG criteria. There are often very practical reasons for this, as some of the highest dividend yields are paid in sectors or by companies that do not or barely fulfil ESG criteria, such as tobacco companies and many companies in the coal, oil and gas sectors. In this context, it should also be borne in mind that their high dividends are often accompanied by increased regulatory, legal and business policy risks.
In its investment strategy, the fund Raiffeisen-GlobalDividend-ESG-Aktien focuses on certain sustainability issues such as responsible financing, diversity, the circular economy and fair and transparent tax policies. The aim of equity selection is for the Raiffeisen ESG Indicator* for the fund portfolio as a whole to be significantly higher than the market as a whole. A minimum value of 50 applies to the individual equities in the portfolio.
Another special feature is that the Raiffeisen-GlobalDividend-ESG-Aktien currently has around a quarter of its portfolio invested in equities that currently have a very low dividend yield, but which the fund management believes are at the beginning of a long process of growth in their dividend distributions.
These include equities such as Taiwan Semiconductor, ASML, Eli Lilly or Novo Nordisk but also some companies from the "magic seven", which are currently attracting the attention of investors and the media primarily due to their spectacular sales growth, such as Nvidia, Microsoft and Alphabet (Google). Many of these companies have so far only paid out a small fraction of their profits and cash flows as dividends. This proportion is very likely to grow - and for a long time to come (see the example of Coca-Cola). There is no guarantee of this, but the fund management believes the probability is high.
And the Raiffeisen-GlobalDividend-ESG-Aktien does something else differently from many other dividend funds: it invests very actively and seizes opportunities that appear favourable.
Current positioning of the Raiffeisen-GlobalDividend-ESG-Aktien
For example, the fund currently has a relatively high exposure to Japanese equities. Why? The country has a very long dividend culture and many companies with very strong and long-established international market positions. The fund management takes a positive view of Japan's equity market. In addition, the fundamentally undervalued Japanese currency could be on the verge of a prolonged recovery following the sharp fall in the exchange rate in recent years.
Incidentally, some stock market studies in the past have shown that the current environment of falling key interest rates and moderate inflation has usually been a good one for dividend-oriented investors. Of course, this is no guarantee that it will be the same this time round. But it is certainly something that gives us additional confidence, as does the fact that the performance of Raiffeisen-GlobalDividend-ESG-Aktien reached another all-time high a few days ago.
What you should pay particular attention to
Even though high-dividend companies usually have more stable key figures, they are also subject to the risks typical of equity markets, such as fluctuations in value or capital losses.
Of course, dividend equities are also subject to fluctuations in value on the capital markets and can bring not only capital gains but also capital losses.
* The Raiffeisen Kapitalanlage-Gesellschaft m.b.H. continually analyses companies and countries with the help of internal and external research providers. Together with an overall ESG assessment including an ESG risk assessment, the results of the sustainability research are converted into the so-called Raiffeisen ESG Indicator, which is based on a scale of 0 - 100. The assessment is made in consideration of the company’s respective branch of business.
The fund Raiffeisen-GlobalDividend-ESG-Aktien exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.