“When you go globally, you have a much broader range of opportunities,” Shoemake said. “You’re less of a hostage to fortune.”
A broader approach also means a greater variety of income streams. While the top 10 dividend paying stocks in the U.K. FTSE 100 pay 54 percent of the total equity income from the index, in Henderson’s Global Dividend Index, the top 10 dividend payers account for just 10 percent of the total income paid.
Shoemake said it’s not enough for dividend-minded investors to seek out historically long-paid dividends or higher yields -- a fundamental approach should be taken to stock selection.
“Companies must have strong and growing levels of free cash flow,” Shoemake said. “We look for capital appreciation; we don’t want to overpay for the income stream. We pay very close attention to what we’re paying for stocks.”
Henderson’s managers try to avoid companies likely to cut their dividends, Shoemake said, by watching their performance over time.
Paradoxically, rising yields can be a sign of dividend distress, said Shoemake. Henderson looks for a sweet spot in yields between 2 and 6 percent.
“We have to watch out for value traps,” Shoemake said. “When we expect dividends to be high, they’re not always paid. Often, when a company is showing dividend yields of more than 6 or 7 percent, the market is saying that they don’t expect the dividend to be paid; these are value stocks.”
Yields above 6 percent have recently predicted dividend cuts and suspensions in the mining and banking sectors, said Shoemake.
Currently, healthy levels of free cash flow suggest that dividends in the technology, materials and biotech sectors are safe, said Shoemake, while lower levels of free cash flow are insufficient to support many dividends among energy and utilities stocks.
“Technology has shown really strong dividend growth, and tech hasn’t historically been known for the dividends that they are paying,”Shoemake said. “These companies are now maturing, they’re throwing off huge amount of cash, and they’re returning that cash to shareholders through dividends or share buybacks.”