News & Insights

The Wisdom of Dividends as the Prospect of Economic Recovery with Increased Inflation Rises

Key Points

• Dividends tend to be a natural inflation hedge, representing an exposure to nominal earnings.
• Companies slashed dividend payouts in 2020 as a response to the pandemic.
• Coinciding with anticipated recoveries in domestic GDP and corporate earnings, dividend distributions (blue bars in the graph below) are forecasted to rise in the coming years.
• While the forecasted dividend rise may seem aggressive, it actually represents a return to a more normalized level of distribution growth, given the prior decade’s 9% average year-over-year dividend growth.
• Given that dividend growers historically have outperformed dividend yielders, an environment where companies are raising dividends bodes well for the entire equity income space.
• Concurrent with the forecasted distribution increases, the dividend payout ratio (the orange line below) is forecasted to decline, implying the risk of receipt of the rising income stream is declining due to earnings growing faster than dividends.
• The 2021 and 2022 dividend growth forecasts have improved, while the 2023 dividend growth forecast has moderated somewhat since the beginning of 2021. That isn’t unusual, given long forecasting lead times for 2023. All of the forecasted payout ratios have improved since the beginning of 2021, implying that the risk of receipt is declining.