Investing in Dividend Paying Stocks

Transcription

1 For Financial Broker or Advisor use only. Investing in Dividend Paying Stocks Brochure

2 Do you know the only thing that gives me pleasure? It s to see my dividends coming in. John D. Rockefeller 2

3 Contents Why consider dividend paying stocks? 2 The case for dividends 3 The power of dividends 4 Risk/return trade off 5 Reinvesting dividends 6 Dividend growth is key 7 Zurich Life Dividend Growth Fund 8 M&G Dividend Growth Fund 9 1

4 Why consider dividend paying stocks? Whether you are a seasoned investor or a novice, a diversified portfolio should be at the heart of your investment strategy. For investors with a medium to long-term investment horizon, investing in high-yield equities (high dividend paying stocks) is an option. A high-yield stock is generally considered to be a stock whose dividend yield is higher than the yield of its benchmark average (such as the MSCI World). Some key points to consider: More companies are now paying dividends to shareholders. Looking at the S&P 500, the number of dividend paying companies stands at 83%* (418) of companies listed on the index. Interestingly, the dividend payout ratio (i.e. the percentage of net income paid to shareholders in the form of dividends) stands at 31.6% - one of the highest non-recession levels since 2004.* With yields on fixed income currently at historical lows, investors are looking for alternatives and many are turning to high quality, dividend paying companies to invest in. Firms that pay out high dividends are generally mature, profitable and stable. Coca-Cola is a great example of such as company. It has been paying uninterrupted dividends since 1920**. * Source: Factset, 24 March **Source: Standard & Poors, September For the purpose of this brochure, US data has been solely used due to the availability of long-term data. 2

5 The case for dividends Investors are paying more and more attention to dividends and the companies that pay them, due to their ability to provide a predictable source of return, offer the potential for capital appreciation and help buffer market volatility. History has shown that dividends can have a powerful effect on the total return of a diversified investment portfolio. The chart below breaks down the contribution of share price increases and dividends to the total returns of US large-cap companies by decade. Overall, since the 1870 s, dividends have represented over 42% of the total investment returns. Total return of US large-cap stocks by decade 400% 350% 1950s 1990s 300% 1980s 250% 200% 1920s 150% 100% 50% 1870s 1880s 1890s 1900s 1910s 1930s 1940s 1960s 1970s 2000s % -50% -100% Cumulative Dividend Return Cumulative Price Return Source: Robert J. Schiller Research Partners, January Illustrations are based on the historical returns of the S&P 500 Index. Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Warning: Benefits may be affected by changes in currency exchange rates. 3

6 The power of dividends For those of us that invest in global stock markets, we do so with the expectation that we will make money in the medium to long-term. The importance of dividends to the total return of any medium to longterm investment cannot, and should not, be ignored. To demonstrate the power of dividends, the chart below divides the S&P 500 into an equal-weighted total return index*, all dividendpaying stocks and non dividend-paying stocks. The numbers speak for themselves when you consider a $10,000 investment into each category in January $10,000 invested in the S&P 500 Equal-Weighted Total Return Index would have grown to $220,700. Not bad, when you consider the same investment in non dividend-paying stocks would only have grown to $28,400. However, $10,000 invested in the group labelled all dividendpaying stocks would have expanded to $416,511. * An equally-weighted index gives the same weight, or importance, to each stock in a portfolio or index fund. The smallest companies are given equal weight to the largest companies in an equal-weight index fund or portfolio. This allows all of the companies to be considered on an even playing field. S&P 500 dividend payers vs S&P 500 non-dividend payers $450,000 $400,000 $416,511 $ Amount $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $10,000 $220,700 $28,402 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 All Dividend-Paying Stocks S&P 500 Equal-Weighted Total Return Index Non Dividend-Paying Stocks Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. Returns based on monthly equal-weighted geometric average of total returns of S&P 500 component stocks, with components reconstituted monthly. Monthly data 31/1/ /02/2014. Returns are not inflation adjusted. Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Warning: Benefits may be affected by changes in currency exchange rates. 4

7 Risk/return trade off Not only have the dividend payers of the S&P 500 outperformed the non-dividend payers over the thirty two year period , they have done so with less volatility. Compound annual growth rate from % 14% 12% % Performance 10% 8% 6% 4% 2% 0% 0% 5% 10% 15% 20% 25% 30% % Volatility S&P 500 Dividends Payers S&P 500 Non-Dividends Payers Source: S&P Dow Jones Indices, First Trust. Data from Returns are not inflation adjusted. Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Warning: Benefits may be affected by changes in currency exchange rates. 5

8 Reinvesting dividends Reinvesting dividends can be a powerful wealth builder. The chart below compares an initial investment of $10,000. US equity investors who invested in dividend paying stocks and had reinvested their dividends grew their investment 75 fold over the past 45 years to an impressive $753,092. While those that chose not to reinvest their dividends and relied solely on an increasing share price grew their investment 20 fold to $201,982 over the same period. $800,000 $700,000 $753,092 $600,000 $500,000 $400,000 $300,000 $200,000 $201,982 $100,000 $10,000 Dec-69 Dec-71 Dec-73 Dec-75 Dec-77 Dec-79 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13 S&P 500 Total Return S&P 500 Without Dividends Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. Returns based on monthly equal-weighted geometric average of total returns of S&P 500 component stocks, with components reconstituted monthly. Monthly data 31/12/ /02/2014. Returns are not inflation adjusted. Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Warning: Benefits may be affected by changes in currency exchange rates. 86

9 Dividend growth is key Reinvesting dividends can play a key role in the total investment returns received by investors. However, equally important is dividend growth, i.e. the percentage increase in the value of dividends paid by a company from one year to the next. Mc Donald s is a great example of a company that has almost 30 years of dividend increases, with dividend growth averaging 11% over the past four years*. A history of strong dividend growth could indicate that future dividend growth rate is likely, although not guaranteed, signalling long-term profitability for a company. A recent research study compiled by Société Générale** found that the single biggest contributor to nominal equity returns across developed markets over the past 40 years has been dividend growth. To illustrate how important dividend growth is to total returns, let s look at the graph that was discussed on page 4, this time with the addition of a Dividend Growers group, i.e. dividend paying companies that raise their dividends. The initial investment returns from this group far exceed those of all other groups, with $10,000 expanding to an impressive $564,328. * Source: Standard and Poors, October ** Source: Société Générale, February How dividend growers outperform $610, ,328 $510,000 $410,000 $416,511 $310,000 $210,000 $220,700 $110,000 $10,000 $28,402 Jan-72 Jan-74 Jan-76 Jan-78 Jan-80 Jan-82 Jan-84 Jan-86 Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 All Dividend-Paying Stocks S&P 500 Equal-Weighted Total Return Index Non Dividend-Paying Stocks Dividend Growers & Initiators Copyright 2014 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All rights reserved. Returns based on monthly equal-weighted geometric average of total returns of S&P 500 component stocks, with components reconstituted monthly. Monthly data 31/1/ /02/2014. Returns are not inflation adjusted. Warning: Past performance is not a reliable guide to future performance. Warning: The value of your investment may go down as well as up. Warning: Benefits may be affected by changes in currency exchange rates. 7

10 Zurich Life Dividend Growth Fund The Dividend Growth Fund was launched in July 2005 to meet client demand for an equity strategy with a dividend bias. It is a global equity fund using a stock screening process developed by Zurich and an independent quantitative investment house. The initial screening covers over 6,000 global companies and identifies those with a higher than average dividend yield amongst their peer group in their regional market. It is crucial to identify and exclude companies where the dividend yield is inflated due to a falling share price as a result of poor fundamentals. Thus, the focus of the fund is not necessarily on very high dividend paying companies, rather it is on those with an above average yield plus the capacity to pay and sustain a higher dividend yield over time. The Dividend Growth Fund is focused on identifying sustainable dividend paying shares with the ability to grow that dividend in the future. The approach is a value-based one and therefore, suitable as part of a medium to long-term investment strategy. Warning: If you invest in this product you may lose some or all of the money you invest. Warning: The income you get from this investment may go down as well as up. Warning: This product may be affected by changes in currency exchange rates. 8

11 M&G Global Dividend Fund The M&G Global Dividend Fund was the top selling equity fund in Europe for 2012 * and * The fund aims to deliver a dividend yield above the market average, by investing mainly in a range of global equities. The fund manager employs a bottom-up stock-picking approach, driven by the fundamental analysis of individual companies. The fund s investment strategy is to identify companies that understand capital discipline, have the potential to increase dividends consistently and are undervalued by the stockmarket. Dividend yield is not the primary consideration for stock selection. The fund manager aims to hold around 50 stocks, with a longterm investment view and a typical holding period of three years. * Source: Lipper, European Fund Market Review, 2013 Edition. Warning: If you invest in this product you may lose some or all of the money you invest. Warning: The income you get from this investment may go down as well as up. Warning: This product may be affected by changes in currency exchange rates. Warning: Past performance is not a reliable guide to future performance. This Investing in Dividend Paying Stocks brochure should be read in conjunction with the Under the Bonnet and Sales Aid documents for both the Zurich Life Dividend Growth Fund and the M&G Global Dividend Fund. Each of these documents are available on the Fund Choice section of zurichlife.ie 9

12 Print Ref: ZURL IB Zurich Life Assurance plc Zurich House, Frascati Road, Blackrock, Co. Dublin, Ireland. Telephone: Fax: Website: Zurich Life Assurance plc is regulated by the Central Bank of Ireland. Intended for distribution within the Republic of Ireland. M&G International Investments Limited is authorised and regulated by the Financial Conduct Authority in the UK.