2013
Global dividend-paying equities: Three sources of return in
today’s low-yield market
The Global Value and Income Team
One of the enduring characteristics of the post-financialcrisis world is the consistently low level of yields that is
punishing savers and igniting a widespread search for
income. Central bankers around the world have rewritten
the rules of engagement in this post-crisis environment,
promising to maintain persistently low benchmark interest
rates. We would expect this to result in reduced savings,
increased risk taking, and eventually reduce leverage
through asset inflation. Instead, risk aversion hovers near
generational highs, and we’ve yet to see a general
reallocation of assets from fixed-income investments
toward equity investments. Where do we see opportunities
in this environment? In short, go to where the capital will
need to go. In our view, capital will increasingly flow toward
assets that have an ability to protect real spending power
by participating in the global initiative to ignite better
nominal growth. As we transition from perceived deflation
risk toward asset-oriented inflation, global dividend-paying
equities should benefit.
Global dividend-paying equities provide three sources
of investment return:
Coupon income — or dividend yield
The search for income has occupied an unusually large
portion of the market’s mind, and it is causing meaningful
distortions in the pricing of coupon-paying assets around
the world. Among equities, even relatively stable markets
like the United States are experiencing high valuations in
traditional high-coupon sectors, such as telecom and
electric utility stocks, real estate investment trusts (REITs)
and master limited partnerships (MLPs). These “bond
substitutes” have seen the valuation paradigm move from
growth toward income.
As long as policymakers continue to manipulate interest
rates to abnormally low levels, the relatively high coupons
investors can earn in these areas will continue to draw
capital. As a result, the overall return potential from many
of these investments is not very compelling, given the lack
of valuation upside available to drive returns. Simply said,
in many coupon-driven equities, the best you can hope for
is just the coupon.
When we step outside the most stable and “bond like”
equities and look broadly around the globe, we find
something more appealing. Exhibit 1 illustrates the current
benchmark equity yield available in each major region around
the world. Surprisingly, in every region except the United
States, dividend yields are higher than the 25-year average.
In other words, no other region in the world is as focused
on coupon as the U.S. International markets provide not
only yield but also a second, more significant source of
return — valuation expansion.
Valuation expansion
For us, the fact that many markets are trading at or above
their average dividend yields provides a strong valuation
signal for global dividends. There are a number of ratios
that could expand to drive valuations and deliver strong
investment returns, including price/earnings and price/
book value. Exhibit 2 offers a perspective on the price-toforward-earnings ratio among the top quintile of dividendyielding stocks around the world. The lowest valuations are
currently found in emerging markets.
Exhibit 1: Current yields vs. average yields around the world
Exhibit 2: Valuations of top-yielding stocks worldwide
Developed and emerging markets
nominal dividend yield by region 1
Historical range, average and current yield
1986 through mid-November 2012 2
Developed and emerging markets
best quintile of dividend yield
relative price-to-forward earnings ratios 1
1992 through October 2012
6
1.2
1.1
4
1.0
3
0.9
(x)
(%)
5
2
0.7
Current
Current
Current
0.6
1
EMEA 3
Korea and
Taiwan
South
Asia
China
0.4
0.3
Emerging markets
Developed markets
Range
Latin
America
Developed
Asia
(ex-Japan)
Japan
Continental
Europe
U.K.
0.5
U.S.
0
0.8
Higher ratios; high dividend yielding stocks more expensive
Average
Capitalization-weighted data
Emerging markets since 1992
3
EMEA = Europe, Middle East and Africa
0 5 10 15 20 24 29 34 39 44 48 53 58 63 68 72 77 82 87 92 96
Percentile (100=lower ratios)
U.S.
Current yield
1
Lower ratios; high dividend yielding stocks less expensive
1
Developed markets (ex-U.S.)
Emerging markets
Capitalization-weighted data
2
Source: Empirical Research Partners Analysis
Equity dividend yields are currently running above average in
every region of the world except the U.S. This suggests these
stocks may provide not only income but also capital
appreciation potential.
Source: Corporate Reports, Empirical Research Partners Analysis
The highest yielding dividend stocks in emerging markets have
lower price-to-forward-earnings ratios than those in developed
markets, including the U.S.
Exhibit 3 illustrates how the highest-yielding markets
worldwide have turned out the best long-term performance.
In fact, in every 25-year period since 1900, the highestdividend yielding countries have provided the highest total
returns. Admittedly, this tells us almost nothing about any
single year or other short-term investment horizon.
However, we believe the combination of uniquely high
global equity yields versus history and the intuitively
contrarian track record of outperformance among countries
that have high yields creates a compelling case to allocate
to global dividends.
Exhibit 3: Higher returns from higher-yielding markets
Returns from selecting markets by yield
20
Return (%)
15
10
5
0
1900-2010
1900-24
1925-49
1950-74
1975-99
2000-2010
Lowest yield
Lower yield
Middling yield
Higher yield
Highest yield
Source: Elroy Dimson, Paul Marsh and Mike Staunton
Higher growth rates
To find the third source of return, we ask the question,
“What unlocks the opportunity for good long-term returns?”
The broad-brush answer is improved corporate earnings
growth and greater risk tolerance among investors.
Simple observations through history show us that risk acts
like a pendulum between fear and greed, and we are
currently stuck at the fear end of the spectrum. To unstick
this pendulum, we would likely need to see a combination
of surprisingly good growth and/or surprisingly good
investment returns from “risky” assets. (This could also
show up as surprisingly bad returns in “risk free” assets.)
It remains to be seen what will transpire for risk tolerance,
but the fundamentals for growth among global dividend
payers look promising.
One of the simplest ways to predict growth at the company
level is to look at the expected return on equity (ROE) a
company will earn, and then look at the amount of capital
the company will invest at that ROE. This completely
backward-looking analysis is based on the current ROE and
the current retention ratio of capital. In our experience, this
academic method is a poor predictor of growth on its own.
One way to improve the process is through good oldfashioned bottom-up research — in other words, talk to
and analyze the companies. Through fundamental
research, we have found that companies that are
committed to paying and growing dividends actually
allocate capital to higher return projects and, somewhat
counter intuitively, create higher growth rates.
We’ll save the overall macro predictions for higher growth
or higher risk tolerance for another forum. For now, we feel
confident that a portfolio of global dividend-paying equities
can exhibit better growth than current market expectations
— largely because of what happens at the company level,
not because of government programs or political deals.
We’re bullish on global dividend-paying stocks. The current,
distorted, low-yield environment has taught investors a
dangerous lesson about looking for coupons and valuing
assets accordingly. We don’t blame investors for searching
for coupons, we simply believe that there are compelling
sources that have been neglected because of a temporary
infatuation with “stability.” We believe that extending that
income search a bit further down the spectrum of volatility
will more than compensate investors for the risk they take.
Global dividend stocks provide not only a compelling
source of income via yield but also the opportunity for
valuation expansion, driven in part by growth. In our view,
there is no better combination of return drivers than the
one available from global dividend equities.
Dividend payments are not guaranteed. The amount of a dividend payment, if any, can vary over time and issuers may reduce dividends paid on securities
in the event of a recession or adverse event affecting a specific industry or issuer.
Important disclosures
The views expressed are as of January 2013, may change
as market or other conditions change, and may differ
from views expressed by other Columbia Management
Investment Advisers, LLC (CMIA) associates or affiliates.
Actual investments or investment decisions made by CMIA
and its affiliates, whether for its own account or on behalf
of clients, will not necessarily reflect the views expressed.
This information is not intended to provide investment
advice and does not account for individual investor
circumstances. Investment decisions should always be
made based on an investor’s specific financial needs,
objectives, goals, time horizon and risk tolerance. Asset
classes described may not be suitable for all investors.
Past performance does not guarantee future results and
no forecast should be considered a guarantee either.
Since economic and market conditions change frequently,
there can be no assurance that the trends described here
will continue or that the forecasts are accurate.
Securities products offered through Columbia Management
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