Dividends add to wealth over time even during the era of quantitative easing
A key variable to be analysed is the ability of any asset to generate returns through sustainable dividend income.
So-called yield has become elusive in many asset classes during the era of quantitative easing.
With central banks flushing liquidity into many money channels, the cost of borrowing has moved close to zero for governments and that has pushed returns down for all investors.
This matters because dividends or coupons provide important elements in returns on savings and investments over the long term.
Between 1802 and 2002, for example, the total return on US equities averaged 7.9% per annum, of which 5.8% stemmed from dividends.
In other words, 73% of the actual returns came from dividends.
Between 1900 and 2005, the average returns across global equities produced 5% annually of which 4.5% came from dividends, equating to 90% of your actual returns.
We often forget this in the fog of daily headlines about sharp movements in share prices.
These generate news in the hi-tech world of business television as colourful charts and dramatic strap lines focus on the immediate.
While understandable in a world where most people have developed the attention span of a gnat, it is unhelpful when explaining how to create incremental wealth that keeps you ahead of inflation.
If dividends and their reinvestment are core to any investment portfolio, then finding companies that can deliver reliable annual income at rates above inflation should be a key objective.
However, that too has become a challenge because corporates that seem at first glance to be attractive dividend payers may turn out to be turkeys.
Two good examples lately have been the food retail and commodity sectors.
Each of these sectors contained companies that we liked to believe had sufficiently reliable cash- flows to sustain solid dividends.
They operated in markets where demand for food and commodities was steady and growing in line with economic expansion worldwide.
With yields of 4% or higher, they seemed like obvious candidates for inclusion in an investor’s portfolio but that was not the case.
Food retailing, particularly in the UK, encountered a variety of challenges including the growth of discounters which undermined profitability and an ability to pay dividends.
Not only did the dividends disappear but share prices fell sharply too.
Some of you may also remember that banks were once considered bastions of safe and reliable dividends until the global financial crisis unfolded after 2008.
The crisis washed away many of those supposed blue-chip equities. It is against this backdrop that I try and shape my savings pot.
The attributes worth pursuing are: Companies with long records of paying annual dividends; evidence that the CEOs are strong believers in the importance of paying dividends that are reliable; and evidence that high levels of dividend cover exist.
In an Irish context, a number of companies have proven their ability to satisfy these metrics in the last five years.
The ferry company ICG pays a dividend yield of over 2% and that dividend is covered 2.4 times by profits.
Moreover, its share price has increased by 360% in the last five years.
Food company Total Produce pays a dividend yield of 1.7% and that is covered four times, while its share price is up almost 400% in five years.
The industrials company DCC pays a dividend yield of 1.6% that is covered 2.6 times and its share price rose 300% in five years.
The challenge now is to construct a portfolio for 2016 that can help protect wealth.
The aim is to avoid the inevitable shocks that hit financial markets.
Joe Gill is director of corporate broking at Goodbody Stockbrokers. His views are personal.
