Global equities to produce strong income in 2023, but beware of macro risks
Dividends from global equities are projected to increase in 2023, however the pace of dividend growth is slowing following the post-COVID period when there was a sharp recovery.
That’s according to Plato Investment Management’s latest Global Income Report.
Daniel Pennell, portfolio manager of the Plato Global Shares Income Fund, says the continued post-pandemic growth in global dividends is good news for retirees and other income investors.
“After 2020’s pandemic-driven income cuts, global investors have seen strong growth in dividends across 2021 (+12.8% in AUD), again in 2022 (+15.8% in AUD), and we expect this trend to moderate in 2023 as interest rate rises bite. However, we believe global shares will continue to provide Australian investors a great source of diversified income,” said Mr Pennell.
“In Q4 we continued to see some large companies, for example Microsoft Corp, Johnson & Johnson, and Proctor & Gamble, increase their dollar payouts. In addition, businesses like Volkswagen AG have recently paid out further special dividends. “Across sectors, we’re also seeing some standouts for dividends.
The big recent increases have been from energy companies, with the sector considerably outperforming all other sectors in 2022.
“Strong balance sheets, driven by the commodity rally, enabled increased payouts from businesses including Shell, BP plc and Exxon Mobil Corp. We think this strength can continue into 2023 with energy prices likely to remain elevated.”
Pennell says active portfolio management remains critical, amid economic uncertainty.
“In the current messy global macro environment, it’s important investors are selective when it comes to dividends and pay attention to the risk of dividend traps.
“One sector we’re watching very closely for potential dividend traps is Consumer Discretionary, where yields strengthened further over the past year driven by surprisingly strong household balance sheets. But as we look to 2023, it will be interesting to see how the sector goes, given it historically struggles when we see cost of living pressures and weakening consumer sentiment.”
Plato Investment Management’s propriety Dividend Cut Model is showing an 11.2% chance of dividend cuts in global developed markets in 2023, which is below the long-term average. Plato Investment Management Level 35, 60 Margaret Street Sydney, NSW 200 1300 010 311 plato.com.au “Our modelling, which shows a benign risk of widespread dividend cuts in global developed markets, gives us great confidence in the year ahead for global dividends and continues to indicate a positive outlook for income.
“Although not significantly elevated, Real Estate and Retail are the highest risk industry groups.”
In Q4 2022, global developed markets paid out $A419 billion. Plato notes income growth was positive in AUD terms, (+6.2% v Q4 2021), although this was largely driven by currency movements, another potential benefit of global diversification.
Dividend growth in local currency terms slowed in Q4 (+0.4% v Q42021), reflecting global inflation and concerns regarding economic growth in 2023.
“The small number of companies cutting to zero in Q4 (6.9%) remains at pre pandemic levels. This supports our house view of future dividend strength. “While many investors ignore the income potential in global equities, actively managed global equities portfolios continue to be a pillar of strength for income-seeking investors, importantly, providing diversification away from the traditional Australian income stocks and helping to mitigate concentration risk,” added Mr Pennell.
