Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 103

Not all global equities are created equally

The Australian Treasury’s 2015 Intergenerational Report released a few weeks ago makes for mixed reading. Australians are likely to live longer, which is good news. But this also means they will need more income for a longer retirement, which can be challenging.

So far, Australian investors have largely relied on a few traditional sources of income: term deposits, investment grade credit, and high-yield domestic equities. But we believe that a particular type of global equities – those that pay and grow dividends over time – can be an important addition to their portfolios. These 'dividend growers' have historically generated superior total returns with lower volatility compared with companies that pay a flat dividend, declining dividend, or no dividend at all. Some examples of world dividend growers include Nestle, Emerson Electric and more recently, Microsoft.

Market risk versus longevity risk

Investors approaching retirement face a conundrum. On the one hand, they need stable and secure income that can last for the next 20 to 30 years in retirement. But on the other hand, they also need growing income that can protect their purchasing power against inflation. In short, investors have to grapple with both market risk and longevity risk in retirement.

Traditional sources of income such as term deposits provide a fairly steady stream of income for investors’ current needs. But there is a trade-off – they fall short of delivering the growing income that can help offset the impact of inflation.

To be fair, high-yield Australian equities have delivered strong returns in recent years and franking credits make them even more attractive. However, this group of equities has been dominated by companies in just a few sectors. To put this into perspective, as at September 2014, about half of the dividend income from the S&P/ASX 200 index came from the financial sector. As a result, investors who turn mostly to high-yield domestic equities for income face another trade-off. They lose the benefits of diversification that come with investing in a wider range of companies.

Why dividend growth matters

Australian investors tend to view global equities as a homogeneous asset class, typically seen as a growth asset or a diversifier to domestic equities.

But not all global equities are created equal. Our analysis indicates that dividend growers have a unique profile that can be especially useful when it comes to retirement investing.

Dividend growth matters because it can be an important indicator of a quality company. For companies to pay and grow dividends in a sustainable manner over time, they need to grow their earnings and generate free cash flows. Those with the ability to do so tend to have competitive business models. They also need to have robust balance sheets. Importantly, dividend growth can signal the presence of management teams that have a disciplined approach to capital allocation and are aligned with shareholder interests.

Dividend growth can be a powerful signal of a company’s ability to generate long-term value for shareholders and historical data supports this belief. From end-1989 to end-2014, dividend growers around the world delivered an annualised total return of 10.3% in US dollar terms while the broader market returned 8.5%. Dividend growers also outpaced stocks that did not pay dividends (4.5%), stocks that initially paid dividends but then cut them (5.9%), and even stocks that paid constant dividends (7.7%).

Global dividend growers have historically delivered superior long-term returns

Over the same period of time, dividend growers posted lower volatility compared with the global universe. Their returns were also more resilient than the broader market’s in periods of downturn. On average, dividend growers captured just 85% of the market’s downside. By comparison, steady dividend payers captured as much as 97% of the market’s downside.

A complementary retirement tool

The bottom line is: global dividend growers have the potential to deliver superior long-term returns and lower volatility, as well as an income stream. They can also provide diversification to a domestically-oriented portfolio. These characteristics are crucial for investors approaching retirement.

Australian investors looking to manage market and longevity risks should consider dividend growers as a complement to traditional sources of income. By adjusting their investment approach now, they could potentially better enjoy those well-deserved retirement years.

 

Paul Hennessy is Senior Vice President and Country Head, Australia of Capital Group. This article provides general information and does not address the personal circumstances of any individual.

 


 

Leave a Comment:

RELATED ARTICLES

An alternative asset class for income-seeking retirees

Australia lags global dividend bonanza

Buying dividend growth over dividend yield

banner

Most viewed in recent weeks

16 ASX stocks to buy and hold forever, updated

This time last year, I highlighted 16 ASX stocks that investors could own indefinitely. One year on, I look at whether there should be any changes to the list of stocks as well as which companies are worth buying now. 

UniSuper’s boss flags a potential correction ahead

The CIO of Australia’s fourth largest super fund by assets, John Pearce, suggests the odds favour a flat year for markets, with the possibility of a correction of 10% or more. However, he’ll use any dip as a buying opportunity.

2025-26 super thresholds – key changes and implications

The ABS recently released figures which are used to determine key superannuation rates and thresholds that will apply from 1 July 2025. This outlines the rates and thresholds that are changing and those that aren’t.  

Is Gen X ready for retirement?

With the arrival of the new year, the first members of ‘Generation X’ turned 60, marking the start of the MTV generation’s collective journey towards retirement. Are Gen Xers and our retirement system ready for the transition?

Why the $5.4 trillion wealth transfer is a generational tragedy

The intergenerational wealth transfer, largely driven by a housing boom, exacerbates economic inequality, stifles productivity, and impedes social mobility. Solutions lie in addressing the housing problem, not taxing wealth.

What Warren Buffett isn’t saying speaks volumes

Warren Buffett's annual shareholder letter has been fixture for avid investors for decades. In his latest letter, Buffett is reticent on many key topics, but his actions rather than words are sending clear signals to investors.

Latest Updates

Investing

Designing a life, with money to spare

Are you living your life by default or by design? It strikes me that many people are doing the former and living according to others’ expectations of them, leading to poor choices including with their finances.

Investment strategies

A closer look at defensive assets for turbulent times

After the recent market slump, it's a good time to brush up on the defensive asset classes – what they are, why hold them, and how they can both deliver on your goals and increase the reliability of your desired outcomes.

Financial planning

Are lifetime income streams the answer or just the easy way out?

Lately, there's been a push by Government for lifetime income streams as a solution to retirement income challenges. We run the numbers on these products to see whether they deliver on what they promise.

Shares

Is it time to buy the Big Four banks?

The stellar run of the major ASX banks last year left many investors scratching their heads. After a recent share price pullback, has value emerged in these banks, or is it best to steer clear of them?

Investment strategies

The useful role that subordinated debt can play in your portfolio

If you’re struggling to replace the hybrid exposure in your portfolio, you’re not alone. Subordinated debt is an option, and here is a guide on what it is and how it can fit into your investment mix.

Shares

Europe is back and small caps there offer significant opportunities

Trump’s moves on tariffs, defence, and Ukraine, have awoken European Governments after a decade of lethargy. European small cap manager, Alantra Asset Management, says it could herald a new era for the continent.

Shares

Lessons from the rise and fall of founder-led companies

Founder-led companies often attract investors due to leaders' personal stakes and long-term vision. But founder presence alone does not guarantee success, and the challenge is to identify which ones will succeed in the long term.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.