Morgan Stanley’s Graham Secker offered three reasons, to be precise. But first a bit of context.
Secker calculates that since 1926, the real price return on European stocks has been just 1.3 per cent per annum, compared to a total real return of 5.6 per cent.
In the bull market of the 1980s and 1990s, investors’ focus on dividends faded in the face of higher-than-usual capital gains; however, since 2000 this has reversed, with dividends accounting for a greater proportion of total equity returns.
Anyway, here’s why Secker believes they will be they key driver of equity returns going forward:
1) High demand for income given demographic changes – e.g. as the baby boomers retire, income-related investment strategies become increasingly important.
2) Less income competition from fixed income – Structural issues should keep official policy rates low over the next few years as the authorities look to mitigate the problems associated with a severe debt burden. Yields on longer-term fixed income instruments are/will be higher but offer no protection against inflation and are vulnerable to the poor state of sovereign balance sheets.
3) Range-bound market – We believe equities are locked in an (albeit wide) range-bound market for the next few years as we work through the severe structural macro headwinds that we face. Previous range-bound markets have seen total return indices outperform pure price indices – i.e. income is more important than capital gains in driving total returns.
Due to the meltdown in the banking sector, it is now the case that just 38 companies account for 50 per cent of all European dividend payments (and 96 companies for 70 per cent). Secker says this is the highest concentration risk since his data starts in 1990.
Nonetheless, he has identified 33 companies offering a high and secure dividend yield over the next couple of years.
Click to enlarge:
And note BAT, Sainsbury, Imperial Tobacco, Royal Dutch Shell, TOTAL, Aviva, Zurich Financial, Unibail-Rodamco, Allianz, GlaxoSmithKline, AstraZeneca, Sanofi, Deutsche Post, Atlantia, BAE Systems, KPN, Vodafone, GDF-Suez, National Grid and RWE all have dividend yields greater than their corporate bond yields
Related link:
Goldman’s sterling-slump strategy – FT Alphaville