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How dividends pay investors to wait for the return of growth
In this low growth, high inflation environment, regular dividends may provide investors with some much-needed shelter while the economy recalibrates itself. Here, we discuss how Henderson International Income Trust has used the investment trust tools to grow its dividend in this challenging market.
5 Dec 2023
5 minute read
5 minute read
Key takeaways:
- With low growth and high inflation challenging markets, investors can be hard-pressed to find sources of real return.
- Dividends can provide a useful source of investment return, “paying investors to wait” for valuations to recover.
- By using the advantages of the trust structure, HINT was able to grow its dividend in the year to 31 August 2023, despite broader market challenges.
Investors are facing their most challenging markets for years.
While inflation is falling in most developed economies, it is doing so at a much slower rate than many had expected and is still stubbornly above long-run averages. As such, it has become increasingly likely that most central banks will elect to leave interest rates higher for longer. This will undoubtably have an impact on economic growth over the short-to-medium term, with advanced economies forecast to endure a 1.5% drop in growth from 2022 to 2024. For reference, emerging market economies are also expected to slow down, albeit at a more modest rate.
This high inflation, low growth milieu presents a conundrum for investors – do higher interest rates, accessed through fixed income assets and cash, adequately compensate for the impact of inflation on returns or will other assets offer better returns in the medium-to-long term? While some of the top performing sectors of the past decade have derated in the face of higher rates, such as property and infrastructure assets, others like technology remain on relatively high valuations. Whilst there may be long term value in equity markets timing an entry can seem hard.
While growth stalls, get paid to wait
In this economic environment, a combined focus on income and growth comes into its own, as dividends will ‘pay investors to wait’ for short-term concerns to abate and for businesses to re-rate. This is the approach taken by Henderson International Income Trust plc (HINT), with the investment trust structure allowing us to take a longer-term view on earnings.
HINT is a global mandate and invests across the United States, Europe and Asia. The portfolio specifically excludes investments within the UK, in order to provide UK investors with a truly diversified portfolio, in turn diversifying the economic influences on an investor’s income.
The trust’s objective is to provide shareholders with a growing total annual dividend, as well as capital appreciation. To do this, we screen the investment universe for companies with disciplined and sustained payout policies, based on attractive balance sheets that reinforce a company’s stock valuation.
Global dividend cover for markets in 2022 was in-line with its long-term average, so although cover is expected to fall, it will do so from a higher base. This, combined with the ability of the trust to use reserves to smooth its dividend, is supportive for the trust’s dividend outlook.
Its combined income and growth focus has allowed HINT to ride out the recent market and macro volatility when it comes to distributions: the trust increased payouts by 3.0% year on year to 31 August 2023 and yielded 4.6% at the end of its financial year (31 August 2023). The trust has grown its dividend every year since inception in 2011.
Getting paid dividends from its investments allows the trust to take a longer-term term view, identifying what we believe are high-quality companies at depressed valuations where he expects to see share price recovery in the next few years.
As an example, one of the trust’s most prominent, and positive, allocations over the past three years has been toward the financials sector. While the low interest rates of the past decade were harmful to earnings, companies within the sector were forced to be more disciplined about how they made money. This approach has since literally paid dividends as we moved into a higher interest rate environment, with balance sheet strength and improved earnings allowing for an increase in payouts, despite wider concerns about the economy, and has resulted in capital appreciation on top of the dividends received.
At this point in the cycle, the team is now happy to crystallise the gains made from this allocation; however, it serves as a useful case study of a sector where yields have held and valuations have gradually improved. Looking forward, we see similar characteristics in other depressed areas of the market such as Asian countries, and from a sector perspective, consumer discretionary, technology and utility providers.
While the low-growth environment presents challenges, HINT’s focus on both income and growth and its prudent use of the investment trust structure may allow investors to continue participating in the equity market, comforted by the trust’s dividend, at a time when many are seeking shelter and taking a stint on the sidelines.
| Discrete year performance (%) | Share price (total return) |
NAV (total return) |
|---|---|---|
| 30/09/2022 to 30/09/2023 | 5.6 | 8.1 |
| 30/09/2021 to 30/09/2022 | 1.7 | 2.7 |
| 30/09/2020 to 30/09/2021 | 19.0 | 21.0 |
| 30/09/2019 to 30/09/2020 | -10.4 | -6.1 |
| 30/09/2018 to 30/09/2019 | 3.5 | 3.2 |
Past performance does not predict future returns.
Glossary
Balance sheet
A financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders. It is called a balance sheet because of the accounting equation: assets = liabilities + shareholders’ equity.
Balance sheet strength
A company’s financial position.
De-rating
The downward adjustment of a company’s financial ratios, such as the price-to-earnings (P/E) ratio, in response to business or market uncertainty. Or, in the case of a bond, lowering the credit rating.
Diversification
A way of spreading risk by mixing different types of assets/asset classes in a portfolio, on the assumption that these assets will behave differently in any given scenario. Assets with low correlation should provide the most diversification.
Dividend
A variable discretionary payment made by a company to its shareholders.
Dividend cover
The ratio of a company’s net profits relative to its dividend payment. The measure helps indicate how sustainable a company’s dividend is.
Earnings per share (EPS)
EPS is the bottom-line measure of a company’s profitability, defined as net income (profit after tax) divided by the number of outstanding shares.
Economic cycle
The fluctuation of the economy between expansion (growth) and contraction (recession), commonly measured in terms of gross domestic product (GDP). It is influenced by many factors, including household, government and business spending, trade, technology and central bank policy. The economic cycle consists of four recognised stages. ‘Early cycle’ is when the economy transitions from recession to recovery; ‘mid-cycle’ is the subsequent period of positive (but more moderate) growth. In the ‘late cycle’, growth slows as the economy reaches its full potential, wages start to rise and inflation begins to pick up, leading to lower demand, falling corporate earnings and eventually the fourth stage – recession.
Emerging market
The economy of a developing country that is transitioning to become more integrated with the global economy. This can include making progress in areas such as depth and access to bond and equity markets and development of modern financial and regulatory institutions.
Equity
A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Growth investing
Growth investors search for companies they believe have strong growth potential. Their earnings are expected to grow at an above-average rate compared to the rest of the market, and therefore there is an expectation that their share prices will increase in value. See also value investing.
Inflation
The rate at which the prices of goods and services are rising in an economy. The Consumer Price Index (CPI) and Retail Price Index (RPI) are two common measures. The opposite of deflation.
Volatility
The rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
Yield
The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price. For investment trusts: Calculated by dividing the current financial year’s dividends per share (this will include prospective dividends) by the current price per share, then multiplying by 100 to arrive at a percentage figure.
Disclaimer
Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 78, Avenue de la Liberté, L-1930 Luxembourg, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).
5 Dec 2023
5 minute read
5 minute read
Key takeaways:
- With low growth and high inflation challenging markets, investors can be hard-pressed to find sources of real return.
- Dividends can provide a useful source of investment return, “paying investors to wait” for valuations to recover.
- By using the advantages of the trust structure, HINT was able to grow its dividend in the year to 31 August 2023, despite broader market challenges.
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