As global dividend payouts expand, one dividend strategist says that investors should consider targeting dividend growth, rather than dividend yield.
Christian Magoon, CEO of Amplify ETFs, says that as U.S. monetary policy tightens and other central banks begin to taper their purchases of fixed-income products, dividend growth strategies should outperform high-dividend yield strategies.
“There are more interest rate increases on the horizon, and it’s time to alert many income investors not to only look at duration on the fixed-income side, but also at their exposure to high dividend strategies versus dividend growth strategies,” says Magoon. “We think that most investors are too allocated to high dividend strategies and not enough to dividend growth strategies. That could lead to a shortfall in comparison to their performance expectations, and now is the time to sound the alarm.”
Amplify ETFs offers a suite of dividend products that target growth and yield, including the YieldShares High Income ETF (YYY), the Amplify YieldShares Prime 5 Dividend ETF (PFV) and the Amplify YieldShares CWP Dividend & Option Income ETF (DIVO).
Magoon argues that many high-yielding dividend stocks are simply too expensive as more investors have sought income from their equity allocations. While dividend growers tend to have lower yields, their ability to pay out over time can benefit certain investors.
“Today, many yielding equities have been bid up during the low-rate environment, while some dividend growers are still value opportunities,” says Magoon. “Some dividend growth companies not only continue to grow their dividends, they’re also getting higher multiples because they’re in demand and they’ll continue to be in demand. Over time, if you take a long-term perspective, there’s a great place for dividend growth investing and your return could exceed what you get in a high dividend product.”
Dividend growth took off in the first quarter of 2017, when equities posted the fastest underlying increase in global dividends since late 2015.
According to the most recent “Global Dividend Study” from Janus Henderson, global dividends rose $218.7 billion in the first quarter, expanding at an underlying 5.4 percent rate year over year. Dividend growth was strong across most industries and regions, except Europe.
Each year Janus Henderson, formerly Henderson, analyzes dividends paid by the 1,200 largest firms by market capitalization, and estimates dividends for stocks outside of the top 1,200.
In the U.S., total dividends were down 0.7 percent to $106.9 billion, driven by a $7 billion falloff in special dividend payments. Underlying dividend growth, which does not include special dividends in its calculation, increased to 5.3 percent. Janus Henderson credits the underlying growth to the rebound of the U.S. banking sector.