Record global dividends in 2023 – but why and how should investors take advantage

Income investors will be happy to hear that global dividends hit a record high in 2023.

According to the latest Janus Henderson Global Dividend Index, global dividends rose by 5% on an underlying basis to a total of $1.66 trillion*. The final quarter was particularly strong thanks to a number of factors, with strength in Europe, UK and Japan augmented by larger-than-expected special dividend payments and US dollar weakness.

A total of 22 countries saw record pay-outs – including the likes of the US, France, Germany, Italy, Canada, Mexico and Indonesia*. As expected, the US – as the world’s largest economy – continued to make the largest contribution to higher dividends – but its growth rate remains in line with the global average. By contrast, returns from emerging markets were flat, while most developed countries in Asia Pacific ex Japan saw lower pay-outs year-on-year.

Continued optimism for global dividends?

Janus Henderson head of global equity income, Ben Lofthouse, says: “Pessimism over the global economy proved ill-founded in 2023, although there was considerable divergence from one part of the world to another. Corporate cash flow in most sectors remained strong and this provided plenty of firepower for dividends and share buybacks.”

According to the latest index – which analyses dividends paid by the 1,200 largest firms across the globe – the outlook for 2024 also looks promising, with dividend growth set to remain strong, despite the number of one-off special pay-outs set to fall from the record high seen in the past three years. The report estimates $1.72 trillion in dividends for 2024, up 3.9% on a headline basis*.

From a sector perspective, banks delivered almost half the world’s dividends in 2023*, reflecting the impact of higher interest rates boosting profits. However, it should be noted that much of the improving dividends within the banking sector were offset by cuts in the mining sector – which have come in tandem with falling commodity prices. Beyond this, growth was spread broadly across a wide variety of sectors, such as vehicles, utilities, software, food and engineering.

Ben says there remain uncertainties over the outlook in 2024 due to the “lagged effect of higher interest rates,” as well as the slower global economic growth and the expectation of higher funding costs for companies.

“We are nevertheless optimistic for dividends in the year ahead. The run-rate of US dividend growth in the fourth quarter bodes well for the full year, Japanese companies have embarked on a process of returning more capital to shareholders, Asia looks likely to pick up, and dividends in Europe are well supported,” he added.

The regional perspective

Banks boost UK

UK dividends rose 5.4% on an underlying basis, with the banking sector the biggest contributor. HSBC’s return to paying quarterly dividends resulted in it producing the largest dividend increase in the world in 2023 (up $5.1bn). These rises offset the falls in the mining sector.

Elite Rated UK equity income funds include Janus Henderson’s own UK Responsible Income and CT UK Equity Income, while those preferring to go down the investment trust route may like Schroder Income Growth.

Currency revival and special dividends lead rapid rise for Europe

Europe delivered exceptional double-digit dividend growth in 2023 as stronger European currencies and large special dividends from the likes of Volkswagen, Equinor and Moller-Maersk boosted growth*. The total dividend paid broke through the $300bn barrier* with all-time highs in France, Germany, Switzerland, Italy, Norway, Denmark and Austria. Almost a third of all growth came from banks, but it was ably supported by industrials, vehicles, oil producers and healthcare.

Elite Rated funds worth considering include BlackRock Continental European Income and Montanaro European Income.

Tech leads US dividend growth

US pay-outs passed $600bn in 2023, with dividends now three times larger than they were in 2010*. US dividend growth has actually grown twice as fast as the rest of the world since the Global Financial Crisis. Technology remains the single largest contributor to this growth, with double digit increases from Microsoft and Broadcom. Microsoft regained its position as the largest global dividend payer in 2023*.

FundCalibre currently rates the JPM US Equity Income fund in this space, although a number of global equity income funds also have large positions in the US, including M&G Global Dividend (46%**) and Fidelity Global Dividend (31%**).

Japan also delivers double-digit growth

Payouts in Japan also rose by 10.5% on an underlying basis and broke records in Japanese Yen terms* (however, it should be noted the weakness of the Yen versus the US dollar meant it did not reach previous highs).

Over 90% of Japanese companies held or raised dividends, a reflection of the changing corporate culture in the country. Toyota, the largest dividend payer in the region, increased its pay-out by 23%. Baillie Gifford Japanese Income Growth is the only Elite Rated fund in this sector.

Brazil and China curtail growth in emerging markets

Despite emerging markets delivering record dividends for a third year running ($166.1bn), with an 8% increase on a headline basis – dividends were actually flat on an underlying basis, as steep cuts in Brazil offset strong banking pay-outs; while growth in China was also lacklustre*. However, it should be noted that there were bright spots in the likes of Saudi Arabia and Indonesia, while there is hope that Chinese equities now look extremely attractive over the longer term at what are extremely low valuations at present.

The Murray International Trust currently has 11% invested in Emerging Markets and Latin America**.

Asia Pacific ex Japan the only region to see pay-outs fall

Asia Pacific ex Japan was the weakest region in 2023, with pay-outs falling to $172.3bn, down 6% on an underlying basis*. One area to suffer particularly badly was Australia, where large cuts in the mining sector wiped out one fifth of Australia’s dividends in 2023, and saw pay-outs fall by 10.7% on an underlying basis. This fall came despite three quarters of companies – across all sectors – either holding or raising their dividends.

What is the difference between headline and underlying growth?

Headline figures are simply the total amount paid by companies in the index. The underlying growth rate adjusts the headline figure to take account of the impact of exchange rates, volatile one-off special dividends and technical factors related to dividend calendars and changes to the index.

Why are dividends so important for investors?

The importance of dividends can work in two ways. In the short term it can be used to pay for monthly bills amid the increasing pressures of the cost of living crisis – with inflation reaching multi-decade highs in 2023.

Longer term, the role of compounding interest is possibly the most important concept people can learn about when it comes to their finances. Investments that generate an income can work even harder for you. By using the income to buy more shares, bonds or units, your pot grows bigger, and you earn interest on that interest again.

For example, take an investment of £1,000 in the FTSE All Share between 1 January 2012 and 28 September 2022. Based on share price changes alone, that £1,000 investment would have produced a notional return of £1,337 before fees. When dividends are included, the return rises to £1,969 before fees – an increase of 47%***.

Learn more about compounding dividends.

*Source: Janus Henderson Global Dividend Monitor, Edition 41, Q4 2023

**Source: fund factsheet, 29 February 2024

***Source: Brewin Dolphin, October 2022