8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 1/16
PortfolioPractice: Academy
Dividend stocks – an
attractive addition to aportfolio
In the last 40 years dividends contributedroughly one-third to the overall, annualisedreturns of equity investments.
January 2011
In forma t ion for f und d i s tr i b u
tor s
and in s t i t u t iona l in ve
s tor s. No t for
c irc u la t ion to pr i va te
in ve s tor s.
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 2/16
PortfolioPractice: Academy
2
Decisive Insightsfor forward-looking investmentstrategies
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 3/16
3
PortfolioPractice: Academy
Content
4 Dividend stocks – an attractiveaddition to a portfolio
5 Dividend yields different from
region to region
7 Dividends – an underestimatedperformance driver
8 How sustainable are dividends?
10 Dividend stocks – a safe haven?
13 Conclusion
Imprint
Allianz Global Investors
Kapitalanlagegesellschaft mbH
Mainzer Landstraße 11–13
60329 Frankfurt am Main
Capital Market Analysis
Hans-Jörg Naumer (hjn),
Dennis Nacken (dn),
Stefan Scheurer (st),
Richard Wolf (rw),
Lars Düser (ld)
Data origin – if not otherwise noted:
Thomson Financial Datastream.
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 4/16
PortfolioPractice: Academy
4
Dividend stocks – anattractive addition to a
portfolio
The equity markets performed well in 2010. Numerouscompanies registered record profits, so investors have goodreason to expect higher dividends this year. Dividend stocksappear to be an attractive addition to a portfolio, particularlyin the current low-rate environment. Will the higher dividend
payments be sustainable? And what do investments in divi-dend stocks offer at the moment?
In the current market environment a
strategy based mainly on dividends appears
attractive. While the average dividend return
for European companies (which pay out a
large share of their profits in an international
comparison) fell from more than 3.5 % in
mid-2010 to roughly 3.2 % at the end of 2010across the market (basis: MSCI Europe) due to
the stock-market year-end rally, it is still high
in an international comparison. Moreover,
Summa Oeconomica
•Bond-market yields are comparatively low at the moment. In this capital-market
environment dividend stocks appear to be an attractive addition to fixed-income
investments.•In an international comparison, European and Australian companies are particularly
generous and pay out much of their profits to the investors. US companies tend to prefer
a more flexible payout vehicle, namely share buybacks.
•A look at the past shows that dividends are a key factor for a successful equity investment.
Dividends contributed roughly one-third to the overall, annualised returns of equity
investments in the MSCI Europe between 1970 and the end of 2010.
•Dividend payouts tend to be steadier than corporate profits. As a result, shareholders
receive annual revenues from dividend payments. These revenues are relatively reliable,
and investors can do what they want with them.
•Stocks with high dividend returns have tended to be less volatile.
•In view of currently low dividend payout ratios – in the US, the ratio has even dropped to itslowest level in 40 years – and the favourable profit developments in 2010 companies have
room for further dividend increases in the future.
this is only an average figure. With a dividend
strategy focusing mainly on a portfolio of high
yielding stocks, anticipated dividend earnings
can be boosted. According to estimates by
data provider Thomson Reuters Institutional
Brokers’ Estimate System (IBES), 25 out of
the 463 companies listed in the MSCI Europewill probably pay no dividend at all for 2010.
In contrast, more than 120 index companies
offered dividend returns of more than 4 % at
Dividend yields
Focusing on high-dividend
stocks can considerably
boost the dividend yields
of a given portfolio
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 5/16
5
Chart 1: Dividend earnings of European equities are at an attractive level
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20101.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5%
5.0%
5.5%
6.0%
6.5%
Dividend yield MSCI Europe Yield 10-y. German government bonds Dividend yield MSCI Utilities
Past performance is not an indication of future results; Source: Datastream; Illustration: Allianz Global Investors Capital
Market Analysis
the end of 2010. For example, the average
dividend yield of European utilities companies
amounted to more than 4.5 % at the end of
2010. That means that European companies’
dividend payments often clearly exceed
10 year German government bond yields
(2.9 % at the end of 2010; chart 1). Moreover,
price and duration risks of bonds should notbe underestimated, particularly not in the
current low-rate environment.
If companies stick to their dividend policies
and stock prices do not move much, equities
offer a handsome “coupon”.
Dividend yields different fromregion to region
While investors in European equities can
currently enjoy high dividend yields, US
companies are less generous at first sight.
Dividend yields calculated on the basis of
2010 estimates for the Standard & Poor’s
500 (S&P 500) amount to only about 2.0 %
at the moment. Again, focusing investments
on high-dividend stocks helps to boost
anticipated yields considerably. While 123
companies listed in the S&P 500 did not pay
dividends at all, roughly 50 companies paiddividends worth more than 4 % of their market
capitalisation. Moreover, US companies are
much more interested in share buybacks than
their European counterparts; this instrument
is becoming increasingly popular. In 2010, a
total of 490 billion (bn) US-Dollar (USD) was
spent on buying back shares – an increase
of 23 % year over year and more than double
the amount spent in 2009. In 2006, total
dividend payments amounted to only USD
240 bn. Including share buybacks, whichmay be regarded as an indirect payout to
shareholders, the total payout ratio (dividends
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Dividend yield Yield of share buybacks Total yield
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Chart 2: Share buybacks are becoming an increasingly important
payout vehicle for US companies
Source: Standard & Poor‘s; Illustration: Allianz Global Investors Capital Market Analysis
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 6/16
PortfolioPractice: Academy
6
Past performance is not an indication of future results; Source: Datastream; Illustration: Allianz Global Investors Capital
Market Analysis
Chart 3: Low interest level is one reason for low dividend yields in Japan
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 20100.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Yield 10y Japanesegovernment bonds Dividend yieldMSCI Japan Dividend yieldMSCI Pacific ex Japan
In Japan, direct investor participation in a
company’s success via earnings distributions
is smallest. The dividend yield of the MSCI
Japan amounts only to about 1.9 %. Almost all
companies show their good faith and pay out
at least a small share of overall earnings; only
4 members of the MSCI Japan are unlikely topay a dividend for 2010. However, only for
ten companies does the dividend yield come
in at more than 4 %. Here, too, companies
enter into share buybacks to a larger extent.
At the same time the overall yield level is
considerably lower in Japan’s deflationary
environment. In fact, the “low” dividend yields
are still above the average yield of Japanese
bonds (see chart 3).
A look beyond Japan shows that not allcompanies in Asia have closed their pockets;
some of them are quite generous. Investors
who put their money in the Asia-Pacific
region can hope for an average dividend yield
of 3.2 % (basis: MSCI Pacific ex Japan). Roughly
one out of three index members will probably
pay a dividend of more than 4 % of the stock
price registered at the end of 2010 for the
financial year 2010. Australian companies in
particular are generous and pay out much of
their earnings to shareholders.
+ share buybacks) of US companies rises
to an impressive 5.1 % (source: Standard
& Poor’s; see chart 2). A lower number of
outstanding shares tends to push up share
prices and the earnings per share. However,
share buybacks are more volatile and thus
less reliable than dividend payments. As a
more flexible liquidity-steering tool, they aremore closely correlated with the more volatile
earnings performance.
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 7/16
7
Dividends – an underestimatedperformance driver
A glance at past performance – with the
proviso of course that this may change
in future – illustrates the performance
contribution of dividends: If an investor
had made a single investment of 100 euros
in stocks of the MSCI Europe in 1970 and
reinvested the dividend payments annually,he would have had 5.126 euros at his disposal
(before tax) at the end of 2010 – despite
the financial crisis. Without the effect of
the annually reinvested dividends, i. e. if we
consider the “pure“ share price performance,
the portfolio would have grown to only 1,169
euros (see chart 4). The bottom line is that
a good 40 % of the total annualised earnings
of the equity investment over this period
amounting to 10 % was accounted for by the
dividend payments!
In particular, investors in European stocks
enjoyed high dividend payments in the past.
Performance contribution of dividends
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 100
1000
2000
3000
4000
5000
6000
7000
MSCI Europe - Total return index MSCI Europe - Price index
Chart 4: Dividends account for much of the performance
Past performance is not an indication of future results; Source: Datastream; Illustration: Allianz Global Investors Capital Market Analysis
European companies pursued a shareholder-
friendly payout policy during the past few
years. On average, dividends have contributed
about 4.1 % to the overall performance of
the MSCI Europe since 1970. While the price
performance on the North American equity
market was comparable during this period
(6.4 % p. a., excluding dividends), dividend
payments contributed less to the overall
performance (3.6 % p. a.). Companies in thePacific region (in particular in Japan) were
least generous, which is why the dividend
contribution to overall performance was the
lowest world-wide during the past 40 years
(only 2.2 % p. a.; see chart 5).
There appear to be two key questions for
investors seeking information on the future
success of dividend strategies:
• How sustained will dividend earnings be in
the current market environment?• And what advantages can dividend
strategies offer long-term investors?
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 8/16
PortfolioPractice: Academy
8
How sustainable are dividends?
To separate the wheat from the chaff,
therefore, investors need to undertake
a fundamental sustainability analysis,
considering among other things the degree
of profitability and dividend continuity of acompany.
Three factors which hint at stable dividend
earnings in the current market environment
are:
1. The basis for dividend payments, group
profits, probably rose markedly in 2010. In
fact, some companies already announced
new record gains. According to analysts’
estimates used by the data providerIBES, European companies (basis: MSCI
Europe) will have seen their profits rise
by some 35 % in 2009. While the earnings
momentum looks set to weaken in 2011,
further increases are likely.
2. The favourable earnings development
in 2010 is one reason why the dividend
payout ratios were recently down markedly.
A look at the current dividend policies of
Chart 5: Dividend policies most shareholder-friendly in Europe
Performance contribution of dividends and share prices 1970 till 2010 in global
comparison (annualised).
Past performance is not an indication of future results; Source: Datastream; Illustration: Al-
lianz Global Investors Capital Market Analysis
6.4%5.9%
4.1%
4.1 % 3.6 %
2.2%
0 %
2 %
4 %
6 %
8 %
10 %
12 %
MSCI Europe MSCI North America MSCI Pacific
Performance contributionof share prices (p. a.)
Performance contributionof dividends (p. a.)
25 %
30 %
35 %
40 %
45 %
50 %
55 %
60 %
65 %
70 %
75 %
80 %
Payout ratio of European companies (MSCI Europe) Payout ratio of US companies (MSCI USA)70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Chart 6: Low dividend payout ratios offer room for further dividend increases
Dividend payout ratio (dividends/earnings) between 1970 and 2010.
Source: Datastream; Illustration: Allianz Global Investors Capital Market Analysis
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 9/16
9
international groups shows that, in Europe,
the ratio of dividend payouts and earnings
per share is currently moderate in a
historical comparison, at about 45 %. In the
US, the ratio has even dropped to its lowest
level in 40 years (about 30 %; see chart 6).
Companies therefore have room for futuredividend increases.
3. Companies currently have large amounts
of money at their disposal (free cash flow).
As the deleveraging process has made
considerable progress after the financial
crisis and companies have improved their
capital base and reduced their leverage,
companies might increasingly focus onshareholder value once again (chart 7).
Chart 7: US companies have large amounts of cash at their disposal
US companies have large amounts of cash at their disposal
Past performance is not an indication of future results. Source: Datastream; Illustration: Allianz Global Investors Capital
Market Analysis
80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 100.05%
0.06%
0.07%
0.08%
0.09%
0.10%
0.11%
0.12%
Net cashflows of US companies / US GDP (real)
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 10/16
PortfolioPractice: Academy
10
However, there are some factors which argue
against a market-wide increase in dividend
yields:
1. Historical experience has shown that, after
financial-market crises, recoveries tendto be relatively weak and a self-sustaining
upswing is slow to emerge. This supports
the view that the pace of growth will slow
in 2011 after a strong catch-up effect in
2010. Growth looks set to be moderate and
below potential.
2. There are still many companies whose
profits are volatile, for example banks,
which are hard pressed to guarantee
dividend continuity in the face of highrefinancing needs and increasing
regulation.
3. Instead of distributing the free cash flow,
companies might search for investment
opportunities and resume merger activities.
Overall, however, dividends for 2010 will
probably be raised; in fact, some companies
have already announced increases.
Dividend stocks – a safe haven?
Another advantage for investors in high-
dividend stocks is that dividend payments
tend to be steadier than corporate profits. A
comparison of dividend payments and profitsof the companies listed in the MSCI Europe
shows that corporate profits were much more
volatile during the past 30 years (see chart
8). One reason is that the dividend policy is
often a key part of the corporate strategy.
Companies therefore aim at securing steady
dividend payments. As a result, shareholders
receive annual revenues from dividend
payments. These revenues are relatively
reliable, and investors can do what they want
with them each year.
Not only are earnings distributions less volatile,
but also have dividend stocks tended to be
subject to smaller price movements than the
overall market in the past. One possible reason
for lower price volatility is that companies with
high dividend yields offer investors regular
revenues and, in turn, more security. Moreover,
companies with a solid dividend history are
often assumed to have a solid earnings history,
10
Regular revenues
Dividends offer
shareholders regular
revenues, which are
comparatively reliable.
0
200
400
600
800
1000
1200
1400
1600
1800
2000
MSCI Europe: Development of dividends (indexed) MSCI Europe: Development of corporate profits (indexed)
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Chart 8: Dividends are steadier than corporate profits
Source: Datastream, Illustration: Capital Market Analysis Allianz Global Investors
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 11/16
11
Selection criteria for the Dow Jones “Select Dividend” index
family:
Companies
1. whose net dividend returns are among the TOP 30 or TOP 100 of
the relevant market index,
2. which have not reduced their dividend payments at any timeduring the past 5 years, and
3. whose dividend ratio is below 60 %.
While the “U. S. Select Dividend Index” covers the 100 US equities
with the highest dividends and was first calculated in 1992, the
“EURO STOXX Select Dividend 30” and the “Asia/Pacific Select
Dividend 30” indices include the 30 equities with the highest
dividend yields in the relevant regions. The history for these two
indices goes back to 1999.
too. The Dow Jones “Select Dividend” index
family (which is based on the stocks with the
highest dividends taken from broad market
indices for a given region) is a good illustration
of the risk-return profile of a dividend strategy
in comparison to the overall market.
The charts 9-11 show that an investment
strategy based on high-dividend stocks
usually paid off for investors during the last
few years, particularly in the euro area. While
the broad equity market was up only 1.6 %
p. a. since the end of 1998, investors in the
“Dow Jones Euro Stoxx Select Dividend 30”
would have obtained an annualised return
of 9.5 % – despite the bursting of the dotcom
bubble and the recent financial crisis. It is
interesting to note that the higher returnsof high-dividend stocks compared to the
overall market were achieved at the same
risks, measured against the market price
fluctuations (see chart 9).
High-dividend stocks
In the past high-dividend
stocks were less volatile
than the overall market.
High-dividend US stocks have also
outperformed since the launch of the Dow
Jones U. S. Select Dividend Index in 1992,
achieving a return of 12.3 % p. a. vs 11.0 % p. a.
for the overall US market. However, the
dividend strategy entailed somewhat higher
price fluctuations (see chart 10).
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 12/16
PortfolioPractice: Academy
12
Only in Asia/Pacific did dividend strategies
underperform the overall market. Here,
growth stocks did better overall – and these
equities usually do not belong to the high-
dividend segment. Still, the lower volatility of
the Dow Jones Asia-Pacific Select Dividend
30 in comparison to the broader Dow Jones
Asia-Pacific (20.4 % p. a. vs 23 % p. a.) suggests
that a dividend strategy in this region is
nevertheless attractive from a risk-return
perspective (see chart 11).
Moreover, dividend payments are not yet
included in the analysis. Including above-
average dividend payments, dividend stocks
outperform the relevant broad market indices
even more palpably. While this statement is
somewhat unreliable in view of the relatively
short index histories, the result is surprisingly
clear – even taking into account that data
from the past are no guarantee of future
developments.
The search for dividend earnings carries risks,
however, and should not be observed in an
entirely uncritical manner. When buying
shares, dividend earnings can sometimes
give the wrong signals. It is assumed that the
current payments will remain stable in future,but that is not always the case. For example,
until the middle of 2007 financial stocks were
paying glittering dividends. But the onset of
the financial crisis brought huge falls in share
prices – and company profits and dividend
payments crashed with them.
Chart 9: Dividend strategies with
attractive risk-return profiles
Risk-return profile of a European dividend strategy in
comparison to the overall market (from 1998 to 2010).
Chart 10: Dividend strategies with
attractive risk-return profiles
Risk-return profile of a US dividend strategy in
comparison to the overall market (from 1991 to 2010).
Past performance is not an indication of future results;
Source: Datastream; Illustration: Allianz Global Investors
Capital Market Analysis
Past performance is not an indication of future results;
Source: Datastream; Illustration: Allianz Global Investors
Capital Market Analysis
9.5%
19.7%
1.6%
19.8%
0 %
5 %
10 %
15 %
20 %
25 %
Performance p. a. Risk p. a.
DJ Euro STOXX Sel. Dividend 30 DJ Euro STOXX
12.3%
15.9%
11.0 %
15.5 %
0 %
2 %
4 %
6 %
8 %
10 %
12 %
14 %
16 %
18 %
DJ U.S. Select Dividend Index DJ U.S. Price-Index
Performance p. a. Risk p. a.
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 13/16
13
Chart 11: Dividend strategies with
attractive risk-return profiles
Risk-return profile of a Asian dividend strategy in com-
parison to the overall market (from 1998 to 2010).
Past performance is not an indication of future results;
Source: Datastream; Illustration: Allianz Global Investors
Capital Market Analysis
9.0%
20.4%
10.4 %
23.0%
0 %
5 %
10 %
15 %
20 %
25 %
Performance p. a. Risk p. a.
DJ Asia Pacific Sel.Dividend 30 - Price-Index
DJ Asia Pacific -Price-Index
Conclusion
The additional revenue stream from earnings
distributions is not the only way in which
dividend equities can offer added value for
the portfolio in the long run. A fundamental
dividend strategy, under which equities are
selected not on the basis of recently paid, but
future, expected dividends, will permit to earn
handsome dividend yields despite the price
increases of the last few months. This strategyappears to be a promising addition to the
equity portfolio, especially in the current low
interest environment.
Dennis Nacken
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 14/16
PortfolioPractice: Academy
14
Do you know the other publications of CapitalMarket Analysis – the investment think tank?
Analysis & Trends
→ Bonds with a kick from Emerging Markets
→ From emerging markets to growth markets
→ Brazil: Local Hero – Global Winner
→ Asia on the move – gravitational centre of the 21st
century?
→ The sixth Kondratieff – long waves of prosperity
→ Focus: Eco-Trends
→ Outsmart yourself
→ Investing in Scarce Resources
→ Agricultural trends: Seed for growing a portfolio
→ Global investments in a globalised world
→ Demography: a global trend
→ Scarce Resources
→ The Right Way to Invest in the New Normal – 10 Theses
→ After 30 years, all good things...
→ China in 2011 – characterized by growth and change
PortfolioPractice
→ Sustainable – Responsible – Themed strategies
→ The new Zoology of Investment Risk Management
→ Is small beautiful?
→ Investing in Bonds and Equities
→ Focus: The Omega Factor
→ Portfolio Optimisation in Practice
→ Focus: Dividend strategies
→ Active Management
→ Black Swan
→ Sustainable Investing: just a fad?
You can find all the latest publications and podcasts of Capital Market Analysis under:
www.allianzgi.de/capitalmarketanalysis
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 15/16
8/4/2019 Alliance Portfoliopractice-dividend-stocks Jan 2011
http://slidepdf.com/reader/full/alliance-portfoliopractice-dividend-stocks-jan-2011 16/16
PortfolioPractice: Academy
hi bli i i d i i d fi d i i ( ) f h i i di [ ]
www.allianzglobalinvestors.de/capitalmarketanalysis
Allianz Global Investors
Kapitalanlagegesellschaft mbH
Mainzer Landstraße 11–1360329 Frankfurt am Main J
a n u a
r y
2 0 1 1