Why dividend investments?
Surprisingly few investors are aware that dividends make up a very significant proportion of the long-term total return on equity investments, especially if they are regularly reinvested. Depending on the market and period, this accounted for between 30 and 50% of total returns in the past, and in some decades even 70%! Note: It should of course be noted at this point that no reliable conclusions can be drawn about future performance from past returns.
This has not changed that much in recent decades – despite the spectacular price rises of many high-growth, but mostly low-dividend technology stocks. What's more, today's low-dividend growth champions could even become the dividend kings of tomorrow or the day after tomorrow in some cases.
Equities not only offer income opportunities based on their performance, they can also distribute part of the company's profits – the dividend – to shareholders. In the low interest rate environment of the 2010s, this was particularly attractive because dividend yields were often far higher than the interest income from bonds.
Of course, equity dividends and bond coupons are not the same thing, and equities cannot be compared 1:1 with bonds: Equities have higher risks, but also higher potential returns. Dividends can be reduced, completely canceled or even increased at any time, whereas bond coupons cannot. And while it is certain at what price a bond will be repaid on maturity (provided the issuer does not go bankrupt), it is completely uncertain at what price a share once acquired can be sold again later.
What are the advantages of dividends?
High-dividend equities are an attractive and interesting investment alternative for investors who want higher returns than bonds and are prepared to accept the associated and correspondingly higher risks (price fluctuations, possible capital losses) because:
Due to the compound interest effect, reinvested dividends offer the opportunity for considerable additional income in the long term compared to shares that do not pay dividends.
High-dividend equities also fluctuate less than shares in companies that do not pay dividends.
The distributions can also be seen as a kind of buffer in weak stock market phases.
High dividend yields therefore seem desirable. But anyone who believes that it is only about the amount of dividends is mistaken. The most important thing is whether a company can generate these dividends over the long term and continue to increase them, while still retaining enough capital in the company to secure its growth and market position.
Dividend equities score highly when it comes to inflation
Unlike fixed-income bonds, stocks can offer a form of inflation protection with their dividends. While this protection is not perfect, it is often surprisingly good.
Correct equity selection is crucial
However, this requires a good selection of equities, especially a focus on high-quality, solid companies with a strong market position and good business models. This is because they can pass on any general price and cost increases to their customers, meaning that profits and dividends also grow in line with inflation. In recent years, it has even been observed that many company profits have risen faster than the general price level.
A prime example of this is Berkshire Hathaway (built by successful investor Warren Buffet) with its long-term investment in Coca-Cola shares. Berkshire now receives almost 60% of the share purchase price at the time (1988) as dividends - every year, mind you! And the investment itself has multiplied since then. But as I said, the right stock selection is crucial.
This is also the case with Raiffeisen-GlobalDividend-ESG-AKtien, which does things a little differently from many of its competitors and is aimed at investors who not only want to invest in companies with high dividend expectations, but also want to support responsible business practices.
Investing in global equities
In focus: Raiffeisen-GlobalDividend-ESG-Aktien
Information on key data, fund prices, purchase, fund structure, performance, etc. - find out more now!
Fund portrait: Raiffeisen-GlobalDividend-ESG-Aktien
The investment focus of the equity fund is on high-dividend companies with medium and high market capitalization (so-called mid and large caps), primarily from industrialized countries. However, investments in Emerging Marketequities are also possible. Up to this point, this is something that many people do.
However, far fewer funds with a dividend focus invest sustainably according to ESG criteria. There are often very practical reasons for this, as some of the highest dividend yields are paid in sectors or by companies that do not or barely meet ESG criteria, such as tobacco companies and many companies in the coal, oil and gas sectors. In this context, it should also be borne in mind that their high dividends are often accompanied by increased regulatory, legal and business policy risks, which also entails corresponding risks for future dividend payments.
In its investment strategy, Raiffeisen-GlobalDividend-ESG-Aktienfocuses on sustainability issues such as responsible financing, diversity, the circular economy and fair and transparent tax policies. The aim of equity selection is for the Raiffeisen ESG Indicator* for the fund portfolio as a whole to be significantly higher than the market as a whole. A minimum value of 50 applies to the individual equities in the portfolio.
Another special feature is that the Raiffeisen-GlobalDividend-ESG-Aktien currently has around a quarter of its portfolio invested in shares that currently have a very low dividend yield, but which the fund management believes are at the beginning of a long process of growth in their dividend distributions.
These include equities such as Taiwan Semiconductor, ASML, Eli Lillyand Novo Nordisk, however, some companies from the ‘Magic Seven’ are also represented, i.e. those extremely large and rapidly growing US technology companies that have been among the absolute stock market stars in recent years. So far, these companies have only distributed a small fraction of their profits and cash flows as dividends. However, this share is very likely to grow – and for a long time (see the example of Coca-Cola). There is no guarantee of this, but the fund management believes it is highly likely.
And the Raiffeisen-GlobalDividend-ESG-Aktien does something else differently from many other dividend funds: it invests very actively and seizes opportunities that appear favorable.
The fund management team has increased the allocation to selected emerging market equities in recent weeks, following a sharp correction in these markets in the wake of the Iran war. It also bought into selected stocks in the IT sector, having reduced its exposure to this sector in previous quarters. The allocation to US equities was increased modestly, with a corresponding slight reduction in the allocation to European equities.
One reason for this is Europe’s far greater dependence on foreign oil and gas supplies (net importer) compared with the US (net exporter). In addition, the fund continues to favour healthcare stocks, which currently appear particularly promising from a valuation perspective and in view of their projected earnings growth.
The outlook for the global economy, inflation rates, interest rates and financial markets is currently characterised by a very high degree of uncertainty, stemming particularly from the war being waged by the US and Israel against Iran. The fund management is, of course, monitoring the situation very closely on an ongoing basis, but currently considers the fund to be well positioned for the long term. In the event of further, pronounced market corrections, several Japanese and other Asian equities are on the watchlist for potential purchases or additional investments. The emphasis is on companies with good long-term growth prospects and, at the same time, strong pricing power.
Even though high-dividend companies usually have more stable key figures, they are also subject to the risks typical of equity markets, such as fluctuations in value or capital losses.
Of course, dividend equities are also subject to fluctuations in value on the capital markets and can bring not only capital gains but also capital losses.
*Raiffeisen Kapitalanlage-Gesellschaft m.b.H. continually analyses companies and countries with the help of internal and external research providers. Together with an overall ESG rating including an ESG risk assessment, the results of the sustainability research are converted into the so-called Raiffeisen ESG Indicator. The Raiffeisen ESG Indicator is measured on a scale of 0-100. The assessment is made in consideration of each company’s respective branch of business. Further information can be found in German at Raiffeisen-ESG-Indikator and in English at Raiffeisen ESG Indicator.
Raiffeisen-GlobalDividend-ESG-Aktien exhibits elevated volatility, meaning that unit prices can move significantly higher or lower in short periods of time, and it is not possible to rule out loss of capital.