A shared global dividend culture

Aberdeen’s Andrew McMenigall reveals why investors seeking higher dividend yields should look outside the UK.

Dividends have always provided investors with a steady stream of income. But in recent years, with interest rates at rock bottom in developed economies, investors have appreciated the benefits of higher dividend yields.

This is not only because of the equity income they offer, but because being able to pay a steady dividend has been an important signal of corporate health and confidence in difficult markets.

But as UK companies cut dividends to conserve cash, or became insolvent – as RBS or Lloyds did during the credit crunch – investors left with increasingly concentrated portfolios have learnt the value of diversification the hard way.

The aggregate dividend payments paid by UK companies fell by 15% in 2009. And following the loss of BP’s dividend payments, after the Gulf of Mexico oil spill, total dividend payments fell another 3.3% in 2010, according to Capita.

Just how concentrated UK portfolios are now can be seen if one considers Vodafone, HSBC, the National Grid, Royal Dutch Shell and GlaxoSmithKline accounted for around 40% of dividends paid to shareholders on the FTSE100 last year – after BP suspended dividends.

Broader horizons

Understandably, an increasing number of investors are now broadening their horizons, and looking for equity income abroad.

Investors used to focus on the UK’s long-established ‘dividend culture’, where dividends were less likely to be cut than in other countries when the going got tough. But dividend culture is becoming increasingly prevalent outside the UK. It is well established in the US and most of Europe, where companies understand shareholders’ demand for dividends and the need for disciplined capital allocation in order to meet their objectives.

Contrary to received wisdom, dividend yields are higher in the UK than in Europe – the two markets are actually comparable. European firms pay dividends just as reliably as UK companies do. And while capital gains and share buybacks used to be preferred in the US to dividends – which were taxed at a higher rate – tax reforms in recent years are slowly changing US investors’ attitudes to dividends.