Markets

Green Fisher: “Are dividends the solution?”

The situation is not new: Investors have been confronted with the lowest interest rates for years. If you want to take a conservative path to current income and are not prepared to compromise on foreign currencies,

The interest is gone!

The situation is not new: Investors have been confronted with the lowest interest rates for years. If you want to take a conservative path to current income and are not prepared to compromise on foreign currencies, the creditworthiness of the issuer or long terms, you will hardly find anything with bonds. High-dividend stocks are an obvious alternative, which is why many experts are convinced of the theory that the rise in stock markets over the past few years is mainly due to investors who have traded their low interest rates for high dividends.

Rising stocks from dividend hunters?

Surely some private investors have swapped their bonds for dividend stocks in recent years due to the lack of prospects, and institutional investors too have been forced to rethink their search for the “new interest rate”. But should one really deduce from the interest rate development comprehensive effects for the stock markets? No, because the hypothesis mentioned at the beginning is not reliable. Apart from the fact that the majority of investors do not link their wealth distribution exclusively to the development of interest rates and that institutional investors cannot easily change their investment structures at will, market development speaks a completely different language.

Dividend stocks are lagging behind

If the theory were correct that the hunt for dividends would have led to a long-term bull market, stocks with high dividends would have to be able to outperform. But the opposite is the case. In the year to date alone, dividend stocks in US dollars have performed 13.5 percent worse than the broader market. And the long-term perspective also shows this connection. The MSCI World High Dividend Total Return Index even falls behind the broad market over a five-year period if you look at it completely without dividends. In recent years, dividend-focused strategies have not really paid off, which is why the rise in the stock markets cannot be justified in this way.

Interest rates do not dictate the stock markets

On closer inspection, it can also be seen that low or falling interest rates have no correlation whatsoever with the relative return of dividend stocks compared to the broad stock market. The bull market from 2009 to 2020 consistently contained short interim phases with a high-dividend outperformance, but the overriding trend was that these values, including all dividends, delivered a significantly poorer return than the broader market.

High growth stocks, especially in technology, have taken on a prominent leadership role in recent years. Many experts are therefore now inclined to follow a new theory that low interest rates are a positive factor influencing these equity categories. However, the fundamental mistake tends to persist that interest rates do not have such a strong influence on the stock markets.

Conclusion

In principle, there is no connection between falling or low interest rates and equity securities – a theory that many market participants have believed in for years. Dividends are of course particularly attractive in times of low interest rates, but when constructing an equity portfolio – as always – a sense of proportion is required.

You can request the current capital market outlook from Grüner Fisher Investments free of charge at www.gruener-fisher.de.

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