Searching for dividend income

Article #705 by Edward Rizzo - Published Weekly

Although the primary objective of equity investments should be for long-term capital appreciation, the consideration of an adequate regular dividend is hardly ever overlooked by investors. This is probably more pronounced with Maltese retail investors who, before making an investment, invariably look at the potential annual income stream that may be generated through the distribution of dividends. In fact, while many Maltese investors may have focused specifically on the domestic capital market to obtain a sustainable dividend flow over the years, it is highly evident that a number of companies in the major financial markets also offer attractive dividends when compared to the very low yields on sovereign bonds. This is especially important in the context of a diversified portfolio of assets across various markets as a means for achieving one’s investment objectives while remaining mindful of the risks involved.

Over the years, a large number of the companies listed on the Malta Stock Exchange distributed dividends to investors on a regular basis (annually or semi-annually). Unfortunately, a number of these companies halted dividend payments following the start of the pandemic in early 2020. For example, ever since the privatisation of Malta International Airport plc and the listing of the shares on the MSE in December 2002, the company paid out semi-annual dividends to shareholders which however stopped in the first half of 2020 (in respect of the final dividend for 2019) as a result of the abrupt curtailment of business activities due to COVID-19. This was also the case for Simonds Farsons Cisk plc whose financial performance was also materially hit by the pandemic as well as some of the commercial property companies such as Tigné Mall plc and Main Street Complex plc.

Meanwhile, the banks suspended dividend payments in 2020 following the recommendations by the European Central Bank. Nonetheless, both HSBC Bank Malta plc and Lombard Bank Malta plc started distributing dividends to shareholders following the publication of the 2020 annual financial statements some months ago in line with revised guidance by the European Central Bank.

On the other hand, some other companies continued to distribute dividends to shareholders reflecting their resilient performance and limited impact from the pandemic. Currently, the highest dividend yielding equities on the MSE are BMIT Technologies plc (a net yield of 5.96% based on the last dividend distributed two months ago), GO plc (net yield of 4.62%) and Harvest Technology plc (net yield of 4.00%).

Across the international markets, although most of the largest companies in the US (now made up of the big tech firms) do not pay any dividends, there are also a number of companies that continue to distribute regular dividends and the yields are far superior to the benchmark risk-free rate which is the 10-year US Treasury giving a yield of 1.24%.

Many commentators in the US also refer to companies which pay regular dividends as ‘dividend aristocrats’. Essentially, these are companies that are part of the S&P 500 index which paid and increased their annual dividend every year for at least 25 consecutive years. This is a remarkable achievement which may often go unnoticed. Within the list of so-called ‘dividend aristocrats’ there are many familiar names in the consumer staples and healthcare industries such as Coca-Cola, Colgate-Palmolive, Johnson & Johnson and Procter & Gamble. Incidentally, each one of these companies have hiked their dividend every year for at least the last 55 years which is indeed an extraordinary achievement.

At current market prices, the dividend yield on Coca-Cola for example is of 2.94% and following the better-than-expected Q2 results published last week, the share price continued to approach its pre-COVID record level of just over USD60. Over the past 12 months, the share price of Coca-Cola advanced by 18.0% and recovered strongly from the sharp decline recorded during the first half of 2020 following the market sell-off as a result of the pandemic. However, on a calendar year-to-date, the share price of Coca-Cola has underperformed the broader market as the share price has so far only gained 4.4% while the S&P 500 climbed 17.3%.

Similarly, the dividend yields from Colgate-Palmolive, Johnson & Johnson and Procter & Gamble range between 2.1% and 2.5%. Although these are far superior to the yield on the 10-year US Treasury, they may not be attractive enough for certain investors despite the fact that they provide a better hedge against inflation compared to fixed interest rate securities (corporate bonds and sovereign bonds) as evidenced by the track record of dividend hikes over a very long period of time.

On the other hand, companies within the oil and gas sector as well as the telecoms sector in the US, the UK and Europe currently offer some of the highest dividend yields. For example, in the US, Chevron Corp as well as AT&T Inc rank among the companies with the highest expected dividend yields at 5.3% and 7.4% respectively. Although some investors may look at the dividend yield in isolation, the overall return is very important due to wild swings in share prices from one period to the next as was evident over recent months. The share price of Chevron, for example, has so far surged by 17.8% in 2021 in line with the strong performance of the overall energy sector (among the best performing sectors so far in 2021) following a dismal 2020 when Chevron’s share price tumbled by almost 30% as the oil price tanked due to the weakened demand caused by the pandemic.

In the eurozone, Orange SA offers a dividend yield of 9.4% and the French oil-major TotalEnergies SE currently provides a prospective dividend yield of 7.2%.

The other major oil companies listed on the London Stock Exchange in Sterling also traditionally offered high dividends although these were impacted over the past year following the sharp decline in the oil price in the aftermath of the pandemic which has however recovered in a spectacular manner in the past few months. Following the collapse in the demand for oil last year, Royal Dutch Shell plc announced a cut in its quarterly dividend distributions for the first time since World War Two. This reduced the current dividend yield of Royal Dutch to 3.4% while BP plc offers a higher dividend of 5.3%. The share prices of these two oil majors strongly underperformed the market since the start of 2020.

In the UK, many of the residential property development companies offer higher yields to the oil majors with Persimmon offering a prospective dividend yield of 8.2%.

Apart from investing directly in a number of such companies offering some very attractive dividend yields, investors can also obtain exposure to dividend-paying companies via the use of Exchange Traded Funds. An investment in an ETF as opposed to an invest in a company directly helps to reduce the risk of capital depreciation should a company reduce its dividend abruptly as was experienced last year. There are a number of ETF’s available that provide exposure to such dividend yielding equities either in specific regions such as the US and Continental Europe or else across major stock markets offering a mix of such multinationals in the US, Switzerland (namely Nestlé SA and Roche Holding AG) and other European markets.

As a number of companies acted cautiously over the past 18 months due to the pandemic, dividend distributions and stock buybacks are expected to increase substantially in the US on the back of a strong recovery in profitability levels. A leading investment bank indicated last week that dividends from companies forming part of the S&P 500 are expected to grow by about 30%, or the equivalent of USD150 billion in total, during 2021.

Hopefully many of the companies currently listed on the MSE will also manage to resume dividend payments to shareholders in the coming periods which would surely help investor sentiment. The interim reporting season which commenced yesterday could provide possible guidance in this respect.

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This article was produced by Edward Rizzo, Director at Rizzo Farrugia, which is a company licensed to undertake investment services in Malta by the MFSA under the Investment Services Act, Cap. 370 of the Laws of Malta and a member of the Malta Stock Exchange. The company’s registered address is at Airways House, Fourth Floor, High Street, Sliema SLM 1551, Malta.