After a strong opening to 2019 - and one of the longest bull markets in history - investors are becoming more cautious and it seems reasonable to expect a period of consolidation over the coming months.
Against a backdrop of high valuations and stretched corporate profitability, we believe it makes sense to emphasise dividends as the most stable component of total return, and to do so by investing in assets that trade at an attractive yield struck off dividends that will be well supported across a range of economic scenarios.
Finding sustainable dividend growth
Although the late-cycle environment does make the prospects for overall dividend growth more subdued, it is important to note that there are significant differences across regional markets. In geographies like the US and Japan, payout ratios are very low so the risk to dividends, we would argue, is low. In the US, more capital is currently allocated to share buybacks than dividends - so it will be the buybacks that get suspended before we can talk of a threat to the dividends.
In Japan, dividend payout ratios are even lower than the US and Japanese corporates have the additional protection afforded by very strong balance sheets - over 50% of Japanese corporates currently have a net cash position.
But in areas like Europe and the UK we think there's much greater risk to dividend distributions, particularly in sectors or companies where balance sheets are stretched and they're overdistributing - paying out more in dividends than they're generating in cash. We've seen several dividend cuts from some quite high-profile companies over the last 12 months and can probably expect a few more as we look forward.
Current positioning
The Fidelity Global Dividend Fund remains well diversified across geographies and sectors but with a clear defensive tilt. This is because we generally don't see much valuation support in some of the more cyclical sectors if and when margins and cashflows normalise.
The largest stock in the fund today is German exchange group Deutsche Boerse, which has structural growth tailwinds but will also benefit from any uptick in market volatility and/or interest rates. We also have positions in several consumer staples companies such as Procter & Gamble, Colgate and Diageo, healthcare companies such as Roche and publishing businesses such as Wolters Kluwer.
It is important to be selective however, even among traditional defensive stocks and sectors. Over the last decade a lot of debt has been taken on by certain consumer staples companies and in some cases this has compromised the investment case for us. The likes of Kraft Heinz, AB Inbev and British American Tobacco are all examples of companies where the levels of debt look onerous to us.
Elsewhere, there are also pockets of cyclicality in the fund, such as Taiwan Semiconductor and recent addition Informa. Informa is the leading global events and exhibitions business. We bought it following a severe sell-off in the shares during Q4 2018.
Quality matters
This results in an overall portfolio that is cheaper than the market on a dividend yield and free cashflow yield basis. However, we would argue that the quality of the assets in the fund is higher than the market, with more resilient return profiles and lower levels of debt.
We feel our strategy, which is focused on companies with earnings resilience, valuation support and strong balance sheets, yielding more than 3% with distributions growing by mid-single digits will serve investors well in a potentially more volatile and uncertain environment.
Further information
Fidelity Global Dividend Fund portfolio manager Dan Roberts balances conviction and diversification through a portfolio of around 50 high quality companies that he believes possess the strength and resilience to sustainably grow their dividends across a range of economic scenarios. You can learn more about the fund and Dan's latest insight from the links below.
Profile - Fidelity Global Dividend Fund
Factsheet - Fidelity Global Dividend Fund - W Acc
Article - A quality approach pays dividends
This information is for investment professionals only and should not be relied upon by private investors. The value of investments and any income from them can go down as well as up so the client may get back less than they invest. Past performance is not a reliable indicator of future returns. As a result of the annual management charge for the income share class being taken from capital, the distributable income may be higher but the fund's capital value may be eroded, which will affect future performance. The Fidelity Global Dividend Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. Changes in currency exchange rates may affect the value of an investment in overseas markets. This fund invests in emerging markets which can be more volatile than other more developed markets. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi-annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0519/24131/SSO/NA
