Monday, January 17

Distribution funds: the kings of the dividend

Pursuit funds aroused the interest of more conservative investors who saw in them an alternative to the meager returns offered by deposits and bonds. Until the arrival of the coronavirus and the suspension of the dividend by the companies.

Now they have not only returned, but are doing it with more force, becoming a real alternative to buying shares given the prospect that next year the potential of equities will be lower than in 2021. “Therefore, the dividends they should once again be more important as a source of income, “he explains. Thomas Schuessler, portfolio manager del DWS Top Dividende.

Indeed, the fund has increased its distribution for the ninth consecutive time and paid 4 euros per share to its investors in November –35 cents more than in the previous year–, which represents a new record.

Dividends will continue to grow

Looking ahead to the next few months, everything indicates that the shareholder payment will continue to grow. “About 80 percent of the fund’s securities have increased their distribution compared to the previous year, which is reflected in an average dividend growth of 10 percent in the DWS Top Dividende fund portfolio,” Schuessler recalls.

In fact, Janus Henderson has improved his forecast for the full year. The manager calculates a growth of 15.6 percent in general rate, which will place the distributions of 2021 in a new record of 1.46 trillion dollars.

To this must be added that Janus Henderson anticipates that global dividends will have recovered in just nine months from their low in the midst of the pandemic, recorded at the end of March 2020. The underlying growth in distributions will end the year at 13.6 percent. hundred.

What’s more, by 2022 global dividends are expected to fully recover and reestablish their historical upward trend.

An important engine for growth next year will be the banking sector, “where we expect to see continuity in the reestablishment of dividends that began this year thanks to lower capital requirements from regulators,” he says. Jane Shoemake, Client Portfolio Manager, Janus Henderson’s Global Equity Income Team.

And it is not possible to forget that “the banks quickly took advantage of the relaxation of restrictions on distributions and restored their payments at higher levels than seemed possible even a few months ago.”

It also works in favor of these products that “the first companies in the United States that initiated the annual readjustment of dividends demonstrated that companies in that country are willing to adequately remunerate their shareholders,” he adds.

Profitability accompanies

There are several arguments in favor of these products. In addition to paying the coupon, a large number of them are trading with more than attractive returns. The aforementioned DWS Top Dividende advances so far this year above 15 percent.

To this must be added that the options available to the investor are increasingly varied: next to the specific dividend funds, it is easy to find versions of the distribution of income from investment funds belonging to the most profitable categories of this year, such as technology, American equities or energy.

About, José María Luna, partner and founder of Luna y Sevilla Asesores Patrimoniales, mentions the Fidelity Global Technology Y-Dis-EUR, which invest in semiconductors and companies like Microsoft and Apple.

But the Schroder ISF Global Energy A Dis AV Eur also stands out (with stakes in Royal Dutch Shell, BP or Repsol among others), which is close to returns of 60 percent so far this year and which belongs to the energy sector.

And this great variety has also reached indexed investing. The manager Vanguard has an exchange-traded fund that replicates the FTSE All-World High Dividend Yield, an index made up of stocks from large and mid-cap companies that generally stand out for their high dividend yield (like JP Morgan or Nestlé).

We are talking about the Vanguard FTSE All-World High Dividend Yield, which has a return of just over 12 percent.

In the case of patriotic funds, they also register a very positive behavior in 2021, highlighting the Caixabank Bankia Dividend Europe, which earns just over 20 percent.

The philosophy of this fund is not to distribute periodic income among investors, but rather it is an accumulation fund, that is, the dividends received are invested in the fund itself.

In this case, the participant would have the option of reimbursing periodic shares, which would entail an additional tax advantage since they would only have to pay taxes on the capital gains obtained. The fund invests in companies with high dividend yields such as Nestlé, Roche or Novartis.

Another interesting option belonging to this group would be the Bankinter Dividendo Europa, with a profitability in the year above 15 percent, and with investments in Sanofi, Allianz or Axa.

Diversification and protection against inflation

Additionally, they allow the diversification of the investment. As experts recall, these funds make it easy to have a portfolio made up of companies that offer shareholder remuneration, but without having to make an active selection of those companies.

“By investing in a fund we are investing in a basket of different stocks that may behave differently, which reduces the risk of investing in a single company and that our investment depends on the performance of a single security,” he explains Mariano Arenillas, head of DWS in Iberia.

In addition, if we consider high dividend yield equity funds, we reduce the risk that a single company will reduce or eliminate the dividend in that year. This strategy allowed pay-as-you-go funds to continue paying income in 2020.

From Pictet They add liquidity as an advantage over the deposit, something that can be very interesting for the conservative investor, since, unlike fixed-term deposits, they can offer daily liquidity.

All in all, they meet the objective of receiving an annual income, more or less predictable, but without ceasing to be invested in the stock market, the only way to obtain attractive returns at a time when interest rates remain at historical lows and without reducing capital invested, since only the sum of the dividends generated by the shares in the fund’s portfolio is taken into account.

Finally, they can offer additional protection against inflation, since the portfolio of securities that make up these funds can benefit from this price escalation.

In this regard, Arenillas recalls that “the increase in profits in 2021 is influenced by a strong rise in inflation, which in some way would force companies that distribute dividends and also increase what they pay to their shareholders via dividends.”

Furthermore, empirical evidence indicates that dividends tend to grow at a similar rate to price increases, so they should be protected against inflation.

So “if we take these arguments into account, the dividends paid in 2022 out of 2021 should increase in line with business results and inflation,” concludes the head of DWS for Iberia.

Only one downside?

These funds enjoy the same advantages as other collective investment vehicles. In other words, they offer the possibility of transferring the investment to another fund, deferring capital gains.

However, from Pictet they recall that the retail investor must take into account that dividends are taxed in personal income tax at the established rates of returns on movable capital, ranging from 19 percent for the first 6,000 euros to 26 percent from of 200,000 euros. As well as the possibility of double taxation for dividends from foreign companies.