According to the Janus Henderson global dividend index report released overnight in London, global dividend growth is strong. Dividends paid or announced for Q1 2019 totaled $263.3 billion, a 7.8% increase from last year. The U.S. led the pack with an adjusted 9.6% increase to $122.5 billion.
Obviously, that is good news, especially coming, as it does, at a time when markets around the world are worrying about global growth as the U.S./China trade war heats up. At least it is good news at first glance, but there are things about the report, and even the trend itself, that should cause concern.
Firstly, the slowest dividend growth among developed nations came in the U.K., which emphasizes a point I have made in these pages several times before. The potential effects of Brexit are worse than U.S. markets seem to be accounting for. British companies are showing that they would rather hoard cash and shore up balance sheets than distribute to shareholders, indicating a belief that, to use a timely reference, Winter is Coming for companies there.
However, as I pointed out then, U.S. investors are obsessing over potential damage to the $635 billion trading relationship with China, while ignoring the potential damage to the $828 billion relationship with the U.K. and E.U. That makes even less sense when you consider that the China trade issue is one of ongoing policy and can therefore be reversed quickly, whereas Brexit is a problem that really seems to have no solution.
More directly relevant to the U.S., investors here should ask themselves what these high dividend payouts tell us about market conditions and corporate sentiment.
On the surface, that answer is clear: It surely means that U.S. corporations are supremely confident about the future, right?
Well, not necessarily.
When companies make money, they essentially can do three things with it. They can hold it as cash as protection against hard times that are expected to come, they can return it to shareholders in the form of either dividends or stock buybacks, or they can invest it in the hope of producing future growth.
When you think of it like that, paying dividends is not the most optimistic sign; that would be investing in the future. Paying dividends is really the neutral, middle of the road option. It indicates that corporations aren’t expecting strong growth any time soon. Of course, it is not an either/or decision.
Companies are quite capable of investing and paying dividends, and high investment levels in America show that they are doing just that. That said, there are signs that investment growth is slowing. (Incidentally, lest you think that U.K. companies may be investing their cash rather than hoarding it, government data there also show that business investment is declining rapidly).
On a broader level, paying dividends exacerbates the wealth gap that will no doubt be talked about in this seemingly infinite election season. One could argue that most people, through 401Ks and the like, have exposure to stocks, so we all benefit. However, around 85% of stocks are owned by the richest ten percent of Americans so clearly, they will benefit the most.
On the other hand, when businesses invest, everybody wins.
That money flows through the economy, creating jobs and raising wages. As far as dividends are concerned? Increased payouts to rich people are more likely just going to result in more stocks being bought and the wealth gap will be increased even further. That is the way of capitalism, and any believer in free markets will feel that it is not necessarily a bad thing; success should be rewarded.
As true as that is though, the more extreme the wealth gap, the more extreme the measures to counter that become, and the more attractive those extreme policies start to look for many.
That is my point here. I am not trying to make any political argument; I am looking purely at the potential impact on the markets of the news contained in the Janus Henderson report. Big increases in payouts to existing shareholders at a time when domestic investment is faltering will make radical policy proposals more likely in this election, and that, regardless of the eventual outcome of the election or the likelihood of those proposals becoming law, could easily spook the market.
It may seem churlish to look at rising dividend payouts and see bad things behind it, but as welcome as it is for holders of the stocks concerned, it does indicate only middling confidence in future economic growth. Add in the weakness in the U.K., which hints once again at just how devastating the Brexit mess could be, and the Janus Henderson Global Dividend Index report is not all good news.