Perspectives: Dividends - a sound basis for a solid retirement

We are in an era of hyper-financialisation, where the stock markets at times appear to have decoupled from reality. Markets are now more heavily influenced by liquidity and speculation than at any time in my career. ‘Professional’ investors, with their long-term valuation models operate only at the margins, day to day price setting is now in the domain of speculators, both professional and retail.

During the short-term markets focus on news flow and chasing near term capital gains. Fundamentals, such that they can be assessed, do not come into it. The expectation that you might be able to sell shares at a higher price to another investor is the basis of most investment strategies these days. It is so prevalent that it has become the basis of most intermediaries ‘decumulation’ or retirement income strategies. Making assumptions about future capital gains has become the norm and is no longer considered speculation.

It should be remembered that the very basis of equities is to share in the profits of an enterprise. This takes the form of a stream of dividends. Once shares could be traded on secondary markets, a new feature arose - the possibility of capital gain. To feed this desire for speculative capital gain some companies have abandoned dividends and simply buy back shares, enabling even greater opportunity for speculation (at least the company is buying). The problem here is you never see a share of the profits, you just have to hope that someone is prepared to pay a higher price than you did - even if it is the company in question using your own money. (There is good reason why share buybacks were illegal until very recently).

Speculation such as this does not appear to me to be a solid basis for a long and comfortable retirement. Future prices are volatile and unpredictable. The good news is that dividends are much less volatile and unpredictable. This provides a solid underpinning to the value of a long-term investment portfolio. Yields for the overall index may be low right now, but that reflects the fact that a huge proportion of the market is playing the buyback game. Outside of that many companies remain committed to returning money to shareholders.

The chart shows both the relative stability of dividend streams but also the degree to which markets have disconnected from dividends in the near term.

Equities and Dividends

Source: Bloomberg Finance L.P. 31.03.2023 – 31.03.2025. Past performance is not a reliable indicator of future returns.

The stock market has arguably become disconnected from the real world, at least in the way traditional professional investors would understand. The ongoing march of passive index investing leads to a consistent upwards revaluation of the largest index constituents. As trend following investors, we are happy to benefit from this, but we also remain cognisant that the real value of our portfolios lies in their ability to generate an ongoing income stream for our clients. Hence, we pursue a strategy of regularly harvesting the gains from the large cap growth arena into dividend paying solid long-term investments.

David Jane

Premier Miton Macro Thematic Multi Asset Team