Demographic factors are likely to have an increasing and significant impact on global demand for equity income assets including dividend-paying stocks. Experts from the United Nations population division forecast the number of retirees worldwide will reach two billion by 2050 while average life expectancies will continue to rise. This growing group of investors seeks stable income.
While returns from traditional income-generating assets remain suppressed, investors are more likely to focus on those equities that promise the highest yields. However, simply chasing stocks which promise the highest returns can be dangerous. While higher forecast income levels may initially appear attractive, in many cases they may be indicative of heightened risks. In the longer term this can lead to disappointment through cuts in dividends.
The difference between forecast and realised dividend yields demonstrates that a passive investment approach based on forecast yields is not appropriate. In order for an equity income strategy to be successful, careful analysis of how companies allocate their capital is critical. Entities with a disciplined approach to capital management should be better positioned to provide consistent and sustainable returns in the future.
Nick Clay – Newton, a BNY Mellon company