Stock market dividends to keep growing in 2023: portfolio manager

A leading specialist income fund manager says dividends from global stock markets will continue to grow in 2023, however the growth seen over the past few years will moderate.

Daniel Pennell, portfolio manager at Plato Investment Management – a multi-billion dollar Australian-based asset management firm – says the continued post-pandemic growth in global dividends is good news for income investors.

“After 2020’s pandemic-driven income cuts, global investors have seen strong growth in dividends across 2021 (+12.8% in AUD), again in 2022 (+15.8% in AUD), and we expect this trend to moderate in 2023 as interest rate rises bite. However, we believe global shares will continue to provide Australian investors a great source of diversified income,” said Pennell.

“In Q4 we continued to see some large companies, for example Microsoft Corp (NASDAQ: MSFT), Johnson & Johnson (NYSE: JNJ), and Proctor & Gamble (NYSE: PG), increase their dollar payouts. In addition, businesses like Volkswagen AG (ETR: VOW3) have recently paid out further special dividends.

“Across sectors, we’re also seeing some standouts for dividends. The big recent increases have been from energy companies, with the sector considerably outperforming all other sectors in 2022. 

“Strong balance sheets, driven by the commodity rally, enabled increased payouts from businesses including Shell (LON: SHEL), BP plc (LON: BP) and Exxon Mobil Corp (NYSE: XOM). We think this strength can continue into 2023 with energy prices likely to remain elevated.”

Pennell says active portfolio management remains critical, amid economic uncertainty.

“In the current messy global macro environment, it’s important investors are selective when it comes to dividends and pay attention to the risk of dividend traps.

“One sector we’re watching very closely for potential dividend traps is Consumer Discretionary, where yields strengthened further over the past year driven by surprisingly strong household balance sheets.

“But as we look to 2023, it will be interesting to see how the sector goes, given it historically struggles when we see cost of living pressures and weakening consumer sentiment.”

Low probability of dividends being cut

Plato Investment Management released data from its proprietary dividend cut modelling, which shows a 11.2% chance of dividend cuts in global developed markets in 2023, which is below the long-term average. 

Stock market dividends

“Our modelling, which shows a benign risk of widespread dividend cuts in global developed markets, gives us great confidence in the year ahead for global dividends and continues to indicate a positive outlook for income,” said Pennell.

“Although not significantly elevated, Real Estate and Retail are the highest risk industry groups.”

In Q4 2022, global developed markets paid out $A419 billion.

Dividend growth in local currency terms slowed in Q4 (+0.4% v Q42021), reflecting global concerns regarding economic growth in 2023.

However, according to Pennell, only 6.9% of companies cut dividends to zero in the quarter.

“This supports our house view of future dividend strength.”