Capital Ideas^TM

Not all dividends are created equal. At Capital Group, we go to great lengths to study the quality of dividends and uncover dividend compounders, bond proxies and cyclical winners.

In this paper, our investment professionals explain why investing in dividend-growing companies can provide more advantages besides simply offering income in tough times. It has the potential to add value through long-term real return generation, making it an essential ingredient for diversified portfolios.

In a dividend growth strategy, one should expect to find companies that are growing. Their management should exercise good capital allocation discipline and enable dividend payments to reward shareholders. Companies that generate rising stream of free cash flows can guard against inflation. And those with healthy return on invested capital (ROIC) tend to do better than the overall market over time (chart below (LHS) – dividends generated better ROIC against value over the period of analysis).

Capital Group’s analysis shows dividend growers – stocks that pay and consistently grow a dividend – have typically been higher quality firms with solid fundamentals. We believe dividend-focused strategies could provide a more resilient outcome compared to value portfolios. This is because dividend growers tend to have higher earnings and dividend growth potential compared to value stocks.

Uncovering dividend growers is not easy and quantitative screening alone is not enough. This is where fundamental research matters even more in finding companies with the capacity and willingness to commit and grow their dividends.

 

Risk factors you should consider before investing:

• This material is not intended to provide investment advice or be considered a personal recommendation.
• The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
• Past results are not a guide to future results.
• If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease. Currency hedging seeks to limit this, but there is no guarantee that hedging will be totally successful.
• Risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.