Catherine Yoshimoto
With interest rates now on a downward path in the US, the eurozone and the UK, can equities satisfy investors’ demand for income?
- Global dividends hit a record high in 2024, with $606.1 billion paid in Q2 alone, as tech giants like Meta and Alibaba entered the dividend-paying market.
- Equity yields remain low compared to bonds, with the FTSE All-World index yielding 1.86% in September 2024, while the FTSE World Government Bond index yield to maturity stood at 3.03%.
- Dividend-focused strategies can enhance income potential in equity portfolios by prioritising high-dividend-paying sectors and reducing risks of dividend cuts.
The peak in rates may now be behind us
After eleven successive interest rate hikes since 2022, the US central bank changed direction on 18 September. The Federal Reserve said it had greater confidence that inflation is now moving sustainably toward its 2 percent target, cutting its target “Fed Funds” rate by 50 basis point to 4.75-5%.
The Fed’s move has been mirrored by the European Central Bank, which cut rates in June and September, the Bank of England, which reduced its policy rate in August, and by Canada, which has cut rates three times in 2024.
Of the G7 countries, only Japan has yet to join the rate-cutting trend; however, Japan only recently abandoned a 25-year policy of negative interest rates, and its policy rate still stands at a remarkably low 0.25%.
Even if we are now past the peak of the global interest rate cycle, there’s probably still time to lock in yield. But could equities, rather than bonds, the traditional asset class for income-seeking investors, be the way to do it?
Below, we put current global equity income levels into a historical context.
Current global equity yields
In the chart we show the dividend yield since December 1999 of the FTSE All-World index, FTSE Russell’s flagship, capitalisation-weighted index of global equities. The index is built using a modular design approach and includes shares from 48 markets.
At 1.86%, the FTSE All-World index dividend yield at end-September 2024 was below the 24-year average of 2.32%.
FTSE All-World index dividend yield (%)
Source: FTSE Russell, data from 31/12/99-30/9/24. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
This sub-2% headline yield may obscure the fact that global dividends are at an all-time high.
According to asset manager Janus Henderson, which compiles a popular study of global dividend trends, dividends worldwide rose to a record $606.1bn in the second quarter of 2024, more than double the level recorded in the same quarter of 2009[1].
In fact, there were some important newcomers to the dividend paying community this year: US mega-tech stocks Meta and Alphabet and China’s tech giant Alibaba all paid their first-ever dividends in 2024, with these three companies alone helping boost the global Q2 dividend growth rate by 1.1 percentage points, according to Janus Henderson.
But the decline in the FTSE All-World yield tells us that although dividends have been increasing progressively during the last decade (apart from a dip in 2020 following the Covid shock), company share prices have risen even faster.
And the US equity market, which represented 62% by weight of the FTSE All-World index at the end of September, has played an important role in this trend of declining equity income: US large-cap stocks (as measured by the Russell 1000 index) currently have a dividend yield of 1.28%, well below the global average.
Dividend yields and bond yields
Let’s look at equity income from a different perspective: how do current dividend levels compare with the yield available from global bonds? Bonds, after all, are usually income-seeking investors’ first port of call.
In the chart we compare the dividend yield on the FTSE All-World index with the yield-to-maturity on the FTSE World Government Bond index (WGBI), again going back to the end of 1999.
Global equity and bond yields (%)
Source: FTSE Russell, data from 31/12/99-30/9/24. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
It’s an interesting chart, with bonds paying higher income than equities in the first few years of the millennium, then less, then more again.
Of course, this reflects the emergency measures taken by central banks following the 2008/09 financial crisis: their near-zero interest rate and quantitative easing policies had the effect of depressing bond yields along the maturity curve, making equities (temporarily) the higher-yielding asset class. This all changed in 2022, when central banks put rates up sharply to combat a surge in inflation.
Measured by the FTSE WGBI, global government bond yields have been falling sharply in 2024, reflecting the recent decline in short-term interest rates: the yield to maturity on the WGBI at the end of September was 3.03%, down from 3.86% a year earlier.
Nevertheless, government bond yields are still some ways above global equity dividend yields.
Boosting equity index income
Given the importance of dividends to an equity investor, is there a way of boosting them in a portfolio context? Specialist equity income investors have long sought to identify higher dividend-paying shares and to compound their regular payouts into higher long-term total returns.
But an index can do the job as well: it does so by following rules that seek to overweight sectors and companies offering high dividends (while also aiming to reduce the chance of a future cut in dividends).
FTSE Russell offers a broad range of equity indices that prioritise dividend-paying companies. In a separate Insight, we look at a recent addition to this index range.
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