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Dividend tsunami washes onto markets, but growth is on the wane
The dividend wave that has surged on to the global markets shows no sign of abating, and Australian investors are one of the biggest beneficiaries.
According to the latest Janus Henderson Global Dividend Index, the second quarter of 2022 saw dividend payments reach a record in the index’s 13-year history, at US$544.8 billion ($775.9 billion).
This amount represented a rise of 11.3 per cent in gross terms, but on an underlying basis – which is adjusted for special dividends, change in currency (especially the strength of the US dollar), timing effects and index changes – the surge was even more impressive, at 19.1 per cent. Globally, 94 per cent of the 1,200 companies covered by the Index lifted or maintained dividend payments during the quarter.
The strong quarter saw Janus Henderson upgrade its full-year 2022 forecast of dividend payouts to US$1.56 trillion (A$2.22 trillion), but the firm contended that the second half faces growth headwinds from inflation and the strength of the US dollar. If US$1.56 trillion is achieved, it would represent a 6.1 per cent increase (2021 was a 16.8 per cent rise on 2020).
Jane Shoemake, client portfolio manager at Janus Henderson (pictured), says the dividend flow in 2Q 2022 surpassed pre-pandemic levels, “despite the significant economic disruption caused by the pandemic”.
The increase was primarily driven by the oil, financial and automotive sectors. Geographically, Europe and UK were the epicentre of dividend growth, jumping 28.7 per cent and 29.3 per cent respectively, on an underlying basis.
US, Canada, Switzerland and the Netherlands broke previous quarterly records for total payout.
For Australia, while Shoemake stresses that the second quarter “marks a seasonally quieter period for Australian dividends,” local payouts grew by 13.2 per cent in US dollar terms. This put Janus Henderson’s index of Australian dividends at 14.7 per cent above its pre-pandemic level in December 2019.
“The main driver of Australia’s surging payouts continues to be the mining industry, which has benefited from surging commodity prices,” Shoemaker says.
“This quarter’s underlying increase was lower than in recent comparative periods owing to the disproportionately large impact of a cut from major supermarket Woolworths – which had over-distributed in prior quarters – and a slowdown in the post-pandemic rebound in payouts, which had been driving the year-on-year improvement in Australian dividends. The Woolworths cut partially offset a large dividend increase from mining company Rio Tinto, which boosted dividends by 22.5 per cent in US dollar terms (28.8 per cent in A$).”
Looking forward, Janus Henderson expects Australian dividend growth to steady with the post-COVID catch-up almost complete, a slowing global economy, and the likelihood that mining dividends are now close to peaking.
“However, it is important not to let this outlook cloud investor judgement,” Shoemake says. “From a global perspective there is nothing to suggest that global dividends cannot achieve the 5 per cent to 6 per cent annual growth rate that we have become accustomed to over the long-term and we continue to encourage investors to diversify their income exposure by investing globally for exposure to this dividend growth.”
Matt Gaden, the firm’s head of Australia, says that although the June quarter was cyclically quiet in Australia, it underlined the continued importance of dividend income to Australian investors. “For the thousands of self-funded retirees who rely on dividend payouts, strong performances from the likes of Rio Tinto were a welcome boost to their income.
“However, we would caution investors that local payouts are unlikely to maintain their post-COVID strength. This is particularly important given the relatively high concentration of Australian dividend-payers being banks and miners, calling for greater sectoral and geographical diversification from income investors holding the stocks of only a small number Australian companies.”
Gaden’s reference to Rio Tinto highlights one of the most interesting changes in the Australian share market in recent years: the stunning dividend largesse of the big resources companies, based on the rivers of cash flow coming-off high commodity prices. Many dividend-hungry investors have tapped into very high dividend yields on offer in the resources sector, in preference to the old-faithful income sectors such as the banks – but these tempting resources yields carry the caveat (even the expectation) that prices for commodities such as iron ore and coal will decline over the coming years.
