Dividends: does quality matter more than yield?
In a climate where much of investors’ attention is focused on technology shares and issues relating to artificial intelligence, a key component of share returns often tends to take a back seat: dividends.
Over the long term, in fact, a significant proportion of global equity market performance has been generated by dividends paid to shareholders and their reinvestment. This serves as a reminder that returns do not depend solely on share price movements, but also on companies’ ability to generate and distribute profits sustainably over time.
However, when it comes to dividend-oriented strategies, the highest yield does not necessarily equate to the best choice. A particularly generous dividend may sometimes reflect negative market expectations, corporate difficulties or reduced sustainability of future distributions.
For this reason, L&G’s approach is not limited to selecting companies with the highest dividend yields, but seeks to identify companies capable of combining attractive distributions with financial strength. One possible approach is to start with a broad universe of companies from developed markets and then apply a series of selection criteria. Factors generally taken into account include the expected dividend yield and the consistency of dividend growth over time. The aim is to identify companies that have demonstrated a proven ability to reward shareholders on a regular and sustainable basis.
Alongside dividend-related criteria, indicators of corporate quality also play a central role. These include the company’s profitability, the efficiency of its capital utilisation, the quality of the earnings generated, and the company’s capital and financial strength. These factors can help distinguish companies with resilient business models from those that may face greater difficulties in maintaining their dividend policies.
A second issue concerns diversification. Many traditional indices assign greater weighting to larger companies. This can lead to a high concentration of exposure to a limited number of stocks or sectors.
L&G’s Quality Dividend strategies, on the other hand, seek to reduce this risk by distributing weightings more evenly across the selected companies. This type of approach can help limit the portfolio’s dependence on the performance of individual companies and promote greater global diversification.
Generally speaking, an approach that combines criteria relating to dividends and corporate quality represents one possible way of building a global equity exposure geared towards stable income generation.
The strategy aims to combine income generation with a careful selection of high-quality companies, favouring those capable of sustaining dividend payments over time.
Important information
The value of an investment and the income derived from it are not guaranteed and may fall as well as rise. Diversification does not guarantee protection against losses or positive results in every market environment. Investors may not recover the amount originally invested. Past performance is not indicative of future results.
Diversification does not guarantee protection against losses in falling markets.
Dividends are not guaranteed and may fall as well as rise. Past dividend yields are not an indication of future distributions.
This communication is for information purposes only and does not constitute an investment recommendation, financial, legal or tax advice, nor an offer or solicitation to buy or sell financial instruments. Before making any investment decision, you should assess whether the investment is consistent with your objectives, time horizon and risk profile.
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