The past decade has been a fallow patch for equity income as low interest rates have rewarded growth equities, rather than the more day-to-day charms of dividend stocks. However, the sector has reshaped in recent years and may be a beneficiary of the fall-out from the US technology sector. Heightened volatility may prompt investors to start looking for ‘jam today’ rather than ‘jam tomorrow’.
The latest Henderson Global Dividend report showed healthy rises in dividends across the world. Global dividends grew by $1.75trn in 2024, a rise of 6.6% on 2023. A total of 17 countries out of the 49 in the index saw record dividends, including some of the largest payers such as the US, Canada, France, Japan and China. Overall, 88% of companies raised dividends or held them steady in 2024.
Ian Rees, head of multi-asset at Premier Miton, said: “In an era of low interest rates, businesses could borrow at next to nothing and fund their growth. Equity income was quite dull in comparison. These strategies are likely to have a resurgence. It feels like 1999-2000. We are starting to see an end to go-go growth, to buying good, resilient businesses that are cheaply valued. There’s not been a significant shift so far, but as performance starts to deliver, it may build momentum.”
The equity income opportunity set has changed over the past decade. The dominance of the US technology trade means that other companies have had to find other ways to appeal to investors and that has often involved raising dividend payouts. Nowhere is this more clear than in China, where its waning popularity with global investors has led companies to rethink their capital allocation.
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The Henderson index shows that dividends jumped 17.8% in China on an underlying basis in 2024 to a record $62.7bn. Tech giant Alibaba started to pay dividends, and this made a significant contribution to dividend growth in the Chinese market. It distributed $5.1bn during the year, instantly becoming China’s third largest payer and one of the largest in the world. A substantial increase from Tencent also provided a major boost.
Ian Hargreaves, co-head of the Asian & emerging market equities team at Invesco, said: “In China, we are seeing better capital returns in the form of dividends and share buyback programmes. Expected returns from any stock on our company shortlist can only come from three sources: business growth, change in valuation and dividends.
“Our portfolios currently have several examples of Chinese companies that have delivered high single-digit, and in some cases double-digit total shareholder return yields [from dividends and buybacks]. That goes some way to satisfying our demand for double-digit annualised returns, with realistic but conservative assumptions on earnings growth and rerating potential are the ‘cherry on top’.”
Elsewhere in Asia, there have been significant changes to corporate governance, which has brought more companies into the dividend fold. The obvious example of this is in Japan.
Rees said: “Corporate Japan had become quite bloated and inefficient, without a great regard for shareholders. That’s been shaken up by governance reforms, which have put pressure on companies to improve corporate efficiency and eliminate waste. They have cut the fat from their balance sheets. They have raised shareholder returns and earnings per share growth is rising.”
Dividends have been part of this. The Henderson index shows Japanese dividend growth was among the strongest in the world, up 15.5% to a record $86bn.
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The report said: “94% of Japanese companies raised or held dividends during the year, well ahead of the global average. Toyota Motor and Honda made the biggest contribution to growth, accounting for one quarter of the $12bn constant currency increase from the country, but growth was strong across a wide range of companies and sectors. Q4 growth continued the strong trend, with payouts up by 18.0%.”
Other Asian markets have followed Japan’s lead. In Korea, for example, there is the ‘Value Up’ initiative. Eric Chan, manager on the aberdeen Asian Income fund, said: “There are differences in opinion on how effective it has been, but there have been plenty of companies that have come out with formal dividends policies as part of it.”
Even in Western markets, different types of companies are paying dividends. Five of the magnificent seven now pay a dividend – Apple, Microsoft, Nvidia, Meta Platforms, and Alphabet – though in most cases these are too small to register for equity income funds. All of them have a yield below 1%. However, given the current trajectory of their share prices, it may not be too long before they become part of the opportunity set.
Across the world, share prices for small caps have fallen significantly, but small-cap earnings have not fallen to the same extent. This has left dividend yields looking very high for small caps. In the UK, for example, the FTSE Small Cap currently has a yield of 4.3%. In Europe, the MSCI Europe ex UK Smaller Companies index has a yield of 3.1%.
In October, a report by Octopus forecast the FTSE Small Cap index will up its dividend yield to 4.33% in 2025, while the FTSE 100 would trail behind at 3.97%. It pointed out: “Smaller companies continue to deliver attractive levels of dividend growth. Over the 10 years to 2025, overall cash payments have increased by 17.33% for the FTSE 100, whereas FTSE AIM has increased by a much more attractive 68.4%. This highlights the inherent potential in smaller, growth-oriented companies to significantly grow cash dividends.”
This changes the flavour of equity income funds, bringing in more growth opportunities and giving active managers a broader opportunity set. The sector may have more appeal to investors as they look for lower volatility options in the wake of US stockmarket weakness.
