High-dividend stocks lure inflation-wary investors
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Philippa Yelland is a journalist with InvestorDaily, a Morningstar publication.
Investors wary of inflation should be aiming for high-dividend-paying equities to offset inflation due to possible rises in stock prices, a global investment house has said.
Unlike investments in bonds, where inflation ate away at the real value of the fixed coupon payments and the real value of the bond, stocks that paid dividends could offset inflation due to possible rising stock prices, Fidelity Worldwide Investment global chief investment officer Dominic Rossi said.
"Inflation can allow many companies with pricing power in the supply of commodities or even manufactured products to enjoy disproportionate increases in profits that are reflected in their stock prices," Rossi said.
"History shows that high-dividend stocks tend to outperform other assets in periods of sluggish economic growth - which is exactly what we face now."
In a low-yield, low-growth world, Rossi said investors should favour dividend-paying stocks and strategies, with income likely to account for a much more significant part of equity total returns.
For the last 20 years, investors had bought equity markets for capital growth, but now was the time to buy equities for income.
Currently, where yield from traditional income-generating assets such as government bonds had become scarce, particularly in the safest issuers, dividend-paying stocks were a sensible diversification for income-focused investors.
Current dividend yield levels were ahead of their 15-year averages, especially in Europe, where the equities of some companies were yielding more than their bonds.
The world's pharmaceuticals, telecom and automobile sectors offer particularly attractive yields at present. In Australia, the banks and Telstra (TLS) were attractive.
Dividends could grow too because payout ratios were modest around the world and at record lows in the United States, yet many companies were accumulating excess cash.
Investing in income-generating shares (and reinvesting the dividends) was one of the most lucrative ways to invest long term, due to compounding.
"Over the past 40 years, current levels of dividend yield have typically produced double-digit total returns over the subsequent decade," Rossi said.
"The companies which pay dividends are often high-quality, defensive companies with stable and reliable earnings streams that tend to hold up well during periods of market volatility.
"These companies are typically large, robust household names with strong cash flows."