Why
Dividends
Matter
Power your portfolio
with a dividend
focused strategy
Why
Dividends
Matter
There are some investors for whom a
company paying a good level of dividends
suggests low growth prospects. But, there
are many reasons to invest in companies
offering attractive and regular dividend
payments. Not least of which, dividends
and dividend growth are the key drivers
of long term rising share prices.
This document outlines in straightforward terms
some of the key investment principles that support
dividend investing and show how a dividend
focused strategy can power your portfolio.
We hope you find this useful. Please visit
www.fidelity.co.uk or speak to your adviser
for more information.
Key
Facts
Dividends offer an attractive
income source
• Inflation: rising prices erode the purchasing power of your
money, so it’s important for your investments to keep track
with inflation.
• Interest paid on bank deposit accounts tends to be close to
the Bank of England’s base rate, which has been at just 0.5%
since March 2009.
•S
trong demand for UK government bonds has pushed down
the yield payable to holders of these investments, whilst
corporate bonds can offer good levels of income.
•A
lthough this is not guaranteed, the dividend yield payable
on UK companies is attractive relative to other sources of
income and can grow over time.
Dividends offer an attractive
income source
The record low interest
rates investors have
experienced in recent
times are forecast to
continue throughout
2012. And with
inflation still relatively
high, good levels of
investment income
are vital to help grow
portfolios and protect
purchasing power.
Inflation
4.2%
UK Interest Rates
0.5%
Bank Deposit Account
0.3%
UK Government Bonds
2.0%
UK Investment Grade Corporate Bonds
5.4%
FTSE All Share Dividend Yield
3.5%
UK Equity Income Funds
5.1%
Source: Fidelity, Datastream, and Morningstar as at 31.12.11. The value of investments can go down as well
as up and you may get back less than you invested.
Key
Facts
Dividends provide the majority of
total equity returns
•R
einvesting investment income can add a significant boost to
total returns thanks to the multiplying effect of compounding.
•C
ompounding is the effect on overall returns gained by
reinvesting income, which in turn allows that income to
generate its own earnings.
•C
ompounding the additional return from high dividend
paying companies can make a big difference over time.
•A
lthough past performance is not a guide to future results,
over 25 years, the FTSE All Share delivered an extra 517%
due to the impact of reinvesting dividend income.
Source: Datastream, based on capital and total returns on the FTSE All Share Index as at 31.12.11. 759% total return, of
which 242% was capital return and 517% was through the reinvestment of dividend income. Past performance is not a
reliable indicator of future results.
Dividends provide the majority
of total equity returns
FTSE All Share Index
1000
900
+ 759%
total return
(inc dividends)
800
700
600
500
400
+ 242%
price return
300
200
100
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
0
1986
Indexed return
Reinvesting investment
income can give a
significant boost to
total returns. The value
of reinvested dividends
compounds over time
and can make a big
difference.
Source: Datastream, based on capital and total returns on the FTSE All Share Index as at 31.12.11. 759% total return, of which 242% was
capital return and 517% was through the reinvestment of dividend income. Past performance is not a reliable indicator of future results.
Key
Facts
Dividends are less volatile
than earnings
•H
istory has shown that when the market has gone through
periods of earnings downturns, dividend paying stocks have
provided some resilience. However, please remember that
past performance is not a guide to what might happen in
the future.
•A
lthough dividend payments are not guaranteed, companies
often seek to protect their dividend, even when the economic
backdrop deteriorates and profitability comes under pressure.
• T his reflects the fact that dividend income is very important
to investors and company management want to avoid the
reputational risk of a reduced dividend.
Dividends are less volatile
than earnings
MSCI World dividend index
6
-23%
-30%
-33%
-10%
-37%
-60%
-24%
5
Dividend Index - Log scale
Dividends can signal
that a company is well
managed, can generate
cash and is prepared
to return this to
shareholders. Company
managers generally
aim to maintain or grow
dividends, making
them more predictable
and less likely to fall,
even during an
earnings downturn.
+4%
Extent of
earnings
downturns
-2%
-5%
4
Dividend
performance
in earnings
downturns
-6%
3
-2%
2
1
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
Source: Fidelity and Datastream, using MSCI World Index in USD, as at 31.12.11. Past performance is not a reliable indicator of
future results.
Key
Facts
Higher dividend stocks can
potentially offer lower risk
•O
ur research looked at the risk and return of a major index
of global companies (MSCI AC World) over 10 years.
•W
e separated out the companies that have been able to
grow their dividends over this time.
• T he chart shows the historical lower levels of risk for the group
of dividend-growing global companies compared to all of the
companies in the index. Past performance is not a reliable
indicator of future results.
Higher dividend stocks can
potentially offer lower risk
Total returns from MSCI AC World Index
The internal discipline instilled by
company management paying
a regular dividend can have a
prudent effect on the company’s
business strategy. Although this is
not guaranteed, dividends can be
more reliable than both earnings per
share and share prices, potentially
smoothing some of the volatility
of investing in shares. That’s why
research suggests that high income
paying stocks are less volatile than
the overall market.
180%
168%
160%
140%
120%
100%
80%
56%
60%
40%
20%
0%
23%
17%
Return
Dividend Growing Global Companies
Risk
Global Equity Index
Source: Fidelity and MSCI as at 30.11.11 using MSCI AC World in USD. The MSCI AC World index has been divided into
companies that have been able to grow their dividends over 10 years and the cumulative total returns and volatility/risk
of returns of that group of companies. This is compared to the broader MSCI AC World universe where the same figures
are calculated. Past performance is not a reliable indicator of future results.
Key
Facts
High dividend companies
outperform in the long term
• T his analysis shows the long-term annualised returns of
an index of global companies from developed economies
and the level of dividend yield (dividend as a percentage
of the share price) for these companies.
• E valuating the companies in terms of the level of dividend
yield shows that higher dividend yield companies have
outperformed over the long term.
• E ven over shorter term time horizons, the extra return potential
of higher dividend yielding companies can make a significant
difference to total investment returns.
High dividend companies
outperform in the long term
Performance for developed world global companies
12
Total returns (annualised) %
Over time, higher dividend yielding
companies tend to outperform. The
stockmarket rewards dividend paying
companies available at attractive
prices – this can be a signal that the
firm is well managed, can generate
sufficient cash and is prepared to
return this cash to shareholders.
Identifying and analysing companies
based on their ability to pay and
grow dividends can be a valuable
investment strategy.
10
8
6
4
2
0
Low
Average
High
Dividend level
Source: SG Cross Asset Research, FTSE, Factset Fundamentals, over 25 years, as at January
2011. Past performance is not a reliable indicator of future results.
Key
Facts
A healthy outlook for dividends
•M
any investors have focused on the dividend potential
of UK companies, but companies across the world offer
attractive levels of dividend income.
• Increasing exposure to global companies with dividend
potential could be a good way to diversify an existing
investment portfolio.
• Investing in dividend paying companies can certainly
be a wise move over the long term – and in the current
environment, the dividend yields many companies are
offering is attractive relative to history and compared to
other sources of income.
• T here is also the potential for companies to increase
dividends over time.
A healthy outlook
for dividends
Forecast Dividend Levels
14
12
Dividend Growth Expectations %
Many companies around the world
are increasing the earnings they
return to shareholders in the form of
dividends. Even when the economic
outlook may seem gloomy, many
companies are still able to grow
their dividends.
10
8
6
4
2
0
UK
US
Europe ex UK
2011
Japan
Asia ex Japan
2012
Source; SG Cross Asset Research, as at October 2011. Past performance is not a reliable
indicator of future results.
Power your portfolio with a
dividend focused strategy
• Dividends offer an attractive income source
The dividend yield payable on many companies around the world is attractive relative
to other sources of income and can grow over time.
• Dividends provide the majority of total equity returns
Compounding the additional return from high dividend paying companies can make a
big difference over time.
• Dividends are less volatile than earnings
Company managers generally aim to maintain or grow dividends, making them more
predictable and less likely to fall, even during an earnings downturn.
• Higher dividend stocks can potentially offer lower risk
Historical data shows lower levels of risk for companies that have grown their dividend.
• High dividend companies outperform in the long term
Higher dividend yield companies have outperformed over the long term, this can make
a significant difference to total investment returns.
• A healthy outlook for dividends
Increasing the amount of global companies with dividend potential could be a good way
to diversify an existing investment portfolio.
Why
Dividends
Matter
Important Information
The value of investments can go down as well as up and you may get back less than you
invested. For funds that invest in overseas markets, changes in currency exchange rates may
affect the value of your investment. Due to the greater possibility of default, an investment in
corporate bonds is generally less secure than an investment in Government bonds. Default risk
is based on the issuer’s ability to make interest payments and to repay the loan at maturity.
Default risk may therefore vary between different government issuers as well as between different
corporate issuers. No statements or representations made in this document are legally binding on
Fidelity or the recipient. Any proposal is subject to contract terms being agreed.
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and F symbol are trademarks of FIL Limited. IFA0112/1019/CSO3305/0712