Income from global equities? Here's how the year ahead is shaping up

While many investors ignore the income potential in global equities, actively managed global equities portfolios continue to be a pillar of strength for income-seeking investors, importantly, providing diversification away from the traditional Australian income stocks and helping to mitigate concentration risk.

After 2020’s pandemic-driven income cuts, global investors have seen strong growth in dividends across 2021 (+12.8% in AUD), and again in 2022 (+15.8% in AUD). 

We again expect dividends from global equities to increase in 2023, however, that strong growth trend following the post-COVID period when there was a sharp recovery, will moderate as interest rate rises bite. 

How 2022 ended for global dividends

In the final quarter of 2022, we continued to see some large companies, for example, Microsoft Corp, Johnson & Johnson, and Proctor & Gamble, increase their dollar payouts versus Q4 2021. In addition, businesses like Volkswagen AG 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, BP plc and Exxon Mobil Corp. 

We think this strength can continue into 2023 with energy prices likely to remain elevated.

Global developed markets paid out $A419 billion during Q4. Plato notes income growth was positive in AUD terms, (+6.2% v Q4 2021), although this was largely driven by currency movements, another potential benefit of global diversification.

Dividend growth in local currency terms did slow in the quarter (+0.4% v Q42021), reflecting global inflation and concerns regarding economic growth in 2023. While the small number of companies cutting to zero in Q4 (6.9%) remains at pre-pandemic levels. 

This supports our house view of future dividend strength.

A closer look at the year ahead

Plato Investment Management’s propriety Dividend Cut Model is showing an 11.2% chance of dividend cuts in global developed markets in 2023, which is below the long-term average. 

This 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.

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

Importantly, in the current messy global macro environment, investors must be selective when it comes to dividends, and pay attention to the risk of dividend traps.

One global 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.

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

Global shares continue to provide Australian investors with a great source of diversified income.

The continued post-pandemic growth in global dividends is good news for retirees and other income investors. However, amid economic uncertainty active portfolio management remains critical.

You can access Plato's latest Global Income Report here. Or follow the Plato team on LinkedIn for regular insights and updates.