The low-interest environment returns problem – do dividend stocks offer a way out?

In a sustained low interest rate environment, dividend stocks are an essential component in maintaining real purchasing power and achieving positive returns after inflation. Dividend stocks enable investors to participate in a broad equity market and to receive continuous distributions. The low interest rate environment coupled with inflation results in a toxic mix for German investors
Real returns, i.e. the interest income after deduction of the inflation rate, of investors in Europe will in future be just around zero percent. These are the results of a recent study by the independent financial services provider MainFirst. Thomas Meier, Head of Equity Fund Management at MainFirst, describes this trend as worrying. To give one example, calculations by the Bundesbank show that the asset allocation of private households in Germany over the past ten years has enabled an average adjusted increase in value of 1.4 percent per year. Over the past 20 years, the increase in value even reached 2.6 percent per year. However, such returns can no longer be achieved today with an average German portfolio due to the ongoing low-interest rate phase. A new weighting must therefore be given to asset allocation – if money is not to dwindle away. 

The way out of the dilemma: dividend stocks 
In order to be able to generate attractive returns today, investors must rethink their approach. Investors can only achieve higher returns through a change in portfolio allocation away from cash, insurance, pension provisions and similar investments - a share that currently averages 77 percent in German portfolios. In other words, investors will not be able to achieve their savings targets without a significant increase in the equity component, which still has the most attractive performance potential in the long term.

Dividend stocks offer a particularly high return potential, as higher pay-out ratios could be observed here in recent years. In 2018, distributions in Germany totalled more than 50 billion euros for the first time. Despite the more difficult environment, current estimates anticipate further increases for 2019. Investors should therefore pay attention to the quality of dividends when selecting stocks so that returns are as attractive and sustainable as possible. Such dividend stocks can be found above all, where robust business models are in place. The MainFirst Global Dividend Stars is an example of a fund that has equities with high quality, sustainable dividends in its portfolio.

Targeted investment in high-quality dividend stocks 
The fund managers of MainFirst Global Dividend Stars, Thomas Meier and Christos Sitounis, rely on focused stock picking. They invest independently of the benchmark in companies with above-average dividend quality. The decisive factor is not the amount of the dividend, but the sustainability of the distributions. In the view of the fund managers, such dividend distributions are mainly found where robust business models with strong balance sheets, high structural profitability and solid substance are found. In addition to established, defensive large caps, they add more dynamic small and mid-caps that have a higher potential for growth to create a balanced, attractive risk-return profile for investors. To ensure the sustainability of dividend payments, the extent to which the payments are covered by business development and the achievement of a positive free cash flow is determined. Finally, a company is analysed based on valuation ratios in a peer group comparison. If a security has withstood this extensive review, it is usually included in the portfolio on a long-term basis. In addition to individual developments, the team continuously monitors around 600 companies worldwide, with direct company contacts at the heart of the analysis process. The management conducts a total of approximately 300 meetings per year, mainly with decision-makers from companies.

The MainFirst Global Dividend Stars is thus an actively managed fund with a bottom-up-driven stock selection. Its focus lies on substantial dividend titles and the systematic admixture of growth-strong small and mid-caps. Not only in view of the low interest rate environment does it offer an attractive alternative to savings deposits.