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Equity Dividend Strategies – Playing the Recovery in 2021

  • Market sentiment continues to favour an economic recovery in 2021, as vaccination programs help support a pickup in business activity.        
  • Companies are keen to renew their commitments on returning capital to shareholders through dividends.
  • Stable dividend strategies, such as the SPDR® MSCI Australia Select High Dividend Fund and the SPDR® S&P® Global Dividend Fund, aim to offer investors strong yield factor exposure through higher quality stocks from a diverse range of sectors.

Current economic sentiment provides a supportive case for dividend stocks based on recent earnings guidance, analyst projections and general optimism towards a continued economic recovery. Analysts remain positive that the stabilisation of cash flows will support dividend growth globally. This extension of the recovery could see investors considering an allocation to dividend strategies.

Macroeconomic Outlook for Dividends

The change in economic sentiment at the end of 2020 laid the foundation for companies to reflect a more positive outlook in their 2021 earnings guidance. One of the most profound areas where this impact was felt was in dividend expectations. This earnings season, dividend investors heard a number of positive themes that helped shape the future estimates on forward dividends. Three major tailwinds support the ongoing case for investors to consider increasing yield factor exposure by allocating to dividend stocks: 

  • Analyst estimates reflect significant upside potential for dividends, compared to the present value of dividend futures.
  • As business activity resumes, further improvement to fundamentals and earnings expectations could provide additional momentum for analyst revisions to go even higher.
  • Dividend focused strategies — such as the SPDR® MSCI Australia Select High Dividend Fund and the SPDR® S&P® Global Dividend Fund — offer significant exposure to sectors which maintain relatively attractive valuations and should benefit from further economic reflation. 

Many companies that faced cash flow challenges as a result of the global pandemic were forced to ‘take their medicine’ by cutting or suspending dividends in 2020. These firms will be keen to renew their commitment of returning capital to shareholders through dividends. This should benefit the relative valuations of dividend stocks, which were heavily discounted and under-owned in 2020.

This environment could present an opportunity for exchange traded fund (ETF) investors to return to dividend strategies, following momentum seen in other recovery plays. But not all dividend strategies are the same, so be sure to look under the hood. For example, some dividend-orientated ETFs produce ‘quality’ and consistent income for investors by focusing, and selecting, on a long-term track record of dividend stability. While other dividend ETFs may focus primarily on high dividend payers or sector-neutral income. Pure high dividend ETFs may increase the risk of exposure to ‘dividend traps’. Sector-neutral dividend ETFs may dilute an investor’s desired diversification and run the risk of ‘closet indexing’.

Playing the Recovery in 2021 

Below are two strategies to consider:     

  • The SPDR® MSCI Australia Select High Dividend Yield Fund seeks to closely track, before fees and expenses, MSCI Australia Select High Dividend Yield Index, which applies a systematic and disciplined methodology to stock selection. SYI focuses on companies with a five year track record of dividend consistency, sustainability of dividend payouts and which pass quality and performance filters.    
  • The SPDR® S&P® Global Dividend Fund (Ticker: WDIV) closely tracks, before fees and expenses, the S&P Global Dividend Aristocrats Index which is designed to target consistent dividend paying global companies, who have shown increasing or stable dividends for at least 10 consecutive years.