Resilience amidst turbulent waters

Having long been considered banished, inflation has reared its ugly head again. While it may well have already peaked in the world's major economic regions, it is nevertheless here to stay. For 2023, it is thus likely that monetary policymakers, especially those at the US Federal Reserve (Fed) and the European Central Bank (ECB), will maintain a hawkish stance. Indeed, the Fed even seems prepared to accept the cleansing effect of a recession in order to quell inflation expectations.

Geopolitics is another issue that will remain firmly on the agenda this year. According to the “Geopolitical Risk (GPR) Index”, which measures the share of negative coverage of geopolitical events as a proportion of all news reports in ten US newspapers, there is no doubt that 2022 was an exceptional geopolitical year. While the GPR index has returned to normal since Russia's invasion of Ukraine, the impact of events continues to reverberate. The indicator also serves as a reminder of how tense the situation has been over the last more than 30 years.

Since the pandemic-stricken year of 2020, the recovery in dividend payouts continued in 2022 as well.¹ While the proportion of dividend-paying stocks in the STOXX Europe 600 has not quite returned to its pre-COVID level of 2019, over the past year it continued to grow and has almost reached the 90% mark. Likewise, the S&P 500 has all but regained the ground it had lost during the pandemic, while the same is true for Asian markets as measured by the MSCI Asia index ex Japan (see Chart A/).

The development in Europe was more uneven across countries, but the overall trend indicates a further return to normality in 2022. In the majority of countries under review, the proportion of dividend-paying stocks had (almost) reached pre-COVID levels again.

It comes as no surprise that the same pattern can be observed at sector level, with the share of divided-paying stocks rebounding. This normalisation is especially noticeable in those industries that had been hardest hit by the pandemic. These include, in particular, cyclically sensitive consumer goods as well as financial and industrial stocks, albeit there are slight regional variations.

It should be noted here that dividends paid out in 2022 were derived from profits generated in 2021. In this sense, they do not directly reflect companies' earnings situation in 2022. Even so, given everything that has unfolded over the past few years, the willingness to pay out dividends was surprisingly high. The fact that dividend payouts have returned to normal can be interpreted as evidence of the importance companies attach to a stable and reliable dividend policy. 

But how much do dividends contribute to the total return of equity investments? And what lessons can be learned from the past?

Dividends as a component of total return 

While the past never repeats itself, it does provide us with a number of valuable insights. If history is anything to go by, it reveals that dividends could add more stability to a portfolio, as there is a tendency for companies to maintain stable payouts. The only caveat to this are years of crisis, such as 2009 following the outbreak of the global financial crisis, or indeed 2020.

In the past, investors in European equities were the main beneficiaries of high dividend payouts. These helped to stabilise overall performance in periods when markets declined, as an analysis of 5-year investment periods from 1978 to the end of 2022 shows. Dividends were able to partially compensate for share price losses based on five-year annualised returns. For the MSCI Europe index, dividends accounted for approximately 35% of the annualised total return of equity investments over the entire period from 1978 to the end of 2022. In North America (MSCI North America) and Asia-Pacific (MSCI Pacific), dividends were responsible for just over 26% and just under 31% of overall performance, respectively, i.e. more than a quarter in each case.  

Consistency of dividend policies

However, it is not only dividends that can provide more stability for equity investment returns. As a rule, dividends themselves are less volatile than corporate profits, as our own calculations based on data from Robert Schiller demonstrate.² A comparison of dividends and earnings from companies listed on the S&P 500 from 1960 until the end of 2021 reveals that corporate profits fluctuated to a far greater extent than dividends. At an annualised rate of almost 13% the volatility of earnings over the last ten years, in particular, has been significantly higher than that of dividends, which have fluctuated by slightly more than 4% per annum (see Chart B/). 

As shown: the share prices of companies paying dividends fluctuated less on average (i.e. exhibited lower volatility) than those that did not pay any dividends. It is important to note, however, that there has been a trend towards a declining proportion of non-dividend-paying companies in the indices under review over time.

Dividends may not be able to weather every storm, such as COVID-19, but they are able to help provide a degree of reliability that is especially welcome in an era of disruption. In doing so, they could make a significant contribution to the total return of an investment.

¹ Dividend-paying stocks refer to the share of companies in an equity index that have paid out dividends to shareholders as a proportion of all companies listed in the index.
² Shiller, Robert: “U.S. Stock Markets 1871-Present and CAPE Ratio“, last checked on December 13, 2022.