Despite multiple challenges in 2023, including multiple interest rate increases fuelled by stubbornly-high inflation for much of the year, fears of a recession in developed markets proved to be unfounded. Economic growth has generally been better than expected, with Europe surviving the energy crisis and the US economy tolerating rising rates well – despite a mini-crisis in the banking sector at the start of the year.
Companies have ridden out these challenges, and dividend growth has remained strong across many sectors and regions, except for commodity-related areas such as mining, some energy stocks, and chemicals. We were also pleased to see better quality dividend growth, with less reliance on the one-off special dividends and exchange rate effects that were characteristic of 2022.
It has not all been smooth sailing. In Asia, China’s post-pandemic recovery did not provide the economic boost many had hoped for. Economic momentum has fizzled out, as has investor sentiment, dragging down the wider region. China continues to face challenges in property and banking, prompting the central bank to cut interest rates amid other measures to support lending. If these measures succeed the Asia-Pacific region may be the one to watch in 2024.
We expect total global dividends to reach $1.63 trillion in 2023 (as measured by the Janus Henderson Global Dividend Index), an increase of 4.4% year-on-year. This total is slightly less than our initial forecast of $1.64 trillion, largely due to a decrease in special dividends and the disappearance of windfall profits in sectors such as mining and energy. We do not think this is a cause for concern as it represents sustainable growth because the underlying quality of payouts has been better than expected.
According to the Janus Henderson Global Dividend Index, so far this year more than 85% of companies have either increased their dividends or held them steady. However, there was also some moderation of dividend ‘normalisation’, whereby companies have reinstated dividends having cut or stopped them during the pandemic. As this effect has now fully worked through the system, what we see now is more representative of the underlying earnings growth of companies.
For next year, our outlook for global dividends is positive but growth is likely to be more modest than in recent years with fewer special dividends and big jumps in payout ratios. There will be exceptions. Sectors without pricing power – commodities and chemicals, for example – may experience weakness as global supply chains become fully operational.
Dividends are less volatile than earnings over time, with the majority of companies increasing dividends most years. Additionally, dividends are less cyclical than many investors assume, meaning they are generally maintained through periods of economic weakness if the company has good cash flow to support payouts. The dividend growth provided by companies is essential to help investors maintain their purchasing power in real (inflation adjusted) terms.
Sectors such as consumer staples, utilities, pharmaceuticals and telecommunications are dividend stalwarts, providing a buffer to those sectors that are more sensitive to the ups and downs of the economic cycle, including banks, energy companies and miners. An active, diversified approach to income investing across regions and sectors can provide some comfort in times of market uncertainty and support the building of long-term wealth.
Over a longer time horizon, there are several important trends we believe will drive earnings in certain sectors at a more rapid growth rate than seen in the past decade. These include reshoring or ‘near-shoring’, as companies bring manufacturing facilities closer to core markets, as well as decarbonisation and the security of supply chains and energy sources.
Another driver is the acceleration in the use of artificial intelligence (AI). This technology is being used in myriad ways in the private and public sectors, and companies will likely spend a significant amount to support its implementation. We have seen AI technologies in development in sectors such as industrials, agriculture, healthcare, education and local government, as its application can improve efficiency, society, products, services and customer experiences.
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