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Aegon AM: It’s time for investors to consider Dividend Aristocrats, Kings and Diamonds

With equity markets febrile, it is time for investors to consider Dividend ‘Aristocrats’, ‘Kings’ and ‘Diamonds’ to shore up their portfolios? 

 Mark Peden, investment manager, global equities, at Aegon AM says these companies, which have increased their dividend every year over multi-decade periods, should not be ignored in an environment of high inflation, rising interest rates and mounting fears of economic recession.

“Equities have proven to be an excellent long-term asset class and are an important part of any asset allocation,” says Peden. “But with an interest rate tightening cycle just one of several economic headwinds, unbridled enthusiasm for equities is being replaced by cautious optimism.

“We believe this strengthens the case for focusing on quality income stocks, which can enjoy the upside of rising markets while offering some protection should markets falter.

Peden says that across a market cycle, quality dividend-producing stocks are likely to outperform. “Comparing the return of the MSCI AC World Index to the highest quality quintile within that index is instructive,” he says.

“In the period from 31 December 2012 to 31 March 2022 the MSCI AC World Index rose by 211%, but the highest quality quintile within that index (as measured by return-on-equity and net debt/EBITDA) rose by 368%.”

Peden argues that Dividend ‘Aristocrats’, ‘Kings’ and ‘Diamonds’ are a good place to start when assessing quality stocks, which in many cases are household names.

“Only high-quality businesses can sustain growing dividends over such long periods,” he says.

“’Dividend Aristocrats’ are companies which have increased their dividend every year for more than 25 years. We own several in the Aegon Global Equity Income Fund, including Automatic Data Processing, NextEra, Albemarle and Air Products.

“A ‘Dividend King’ is a company with at least 50 years of dividend increases. Pepsico joined that elite band this year, while Johnson & Johnson and Cincinnati Financial have raised their dividends for over 60 consecutive years, making them ‘Dividend Diamonds’.”

The Aegon Global Equity Income strategy targets a 30% income premium to the wider global equity market, as defined by the MSCI All Country World Index. Peden says the 30% premium is the income ‘sweet spot’. Any less and the income may not offer protection, any more and the income may become vulnerable to dividend cuts.

“History shows that once stocks have a dividend yield over 4% then the dividend growth slows materially,” he says. “Above 5% and the growth becomes negligible, while above 6% and the dividends typically decline. Our dividend yield ‘sweet spot’ is between 2% and 4% as that provides the optimal trade-off between premium income and income growth.

“Equity investing can seem easy when you have a strong view on the direction of the market. Bulls can buy the market, go fully invested and seek exposure to high beta. Bears can stay on the sidelines. What if you anticipate a more uncertain outcome, where you think there is likely to be upside, but want some protection if you are wrong? That’s where a dividend-focused approach to equity investing is worth considering.”

 

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