Despite recent market conditions, the current investment environment makes dividend investing attractive for several reasons, says Fabian Degen, fund manager for dividend strategies, DWS Investments…
A relatively high dividend yield compared to bond yields which could attract further capital from bond markets to equity markets.
US companies are sitting on significant amounts of cash on their balance sheets and net cash flows are at a record high which could be a catalyst for further dividend payouts as well as increases in dividends.
The US tax rate on dividends will stay at 15% for the next two years making investors more confident in investing in dividend paying companies.
The government debt problems in Europe and the US, as well as the related loss in European bond values, is a clear indication that the government bond market will lose its status as a risk-free investment. This has changed the minds of investors who are seeking attractive, sustainable yield investments and puts government bonds on the same risk level as equities.
The DWS Invest Top Dividend Fund is currently positioned defensively in terms of both sector and country weighting. Typically a high percentage of companies with an above market dividend yield can be found in non-cyclical sectors such as consumer staples, telecoms, energy and utilities; we are more heavily weighted towards these sectors. Non-cyclical sectors with growth prospects are less affected by the economic cycle and therefore have the ability to pay a sustainable dividend in the long run.
Technology and basic materials are the Fund’s largest overweights against the benchmark. In contrast, the financial and healthcare sectors remain an underweight position in the Fund. However, this is more of a long term play as opposed to being influenced by current market volatility. The dividend yield is currently around 4.5%.
We favour exposure in countries and regions with strong fiscal policies and budgets, for example Canada and Scandinavia.
The biggest opportunity that we see for dividend investing in 2011 and beyond is the low interest rate environment as well as the long term favourable trend of increasing demand for income. A low volatile and defensive dividend strategy should offer an attractive investment profile for investors in the current market environment.
For risk adverse, fixed income investors, dividend paying companies will be the first step back into the equity markets.