Don’t ignore the power of dividends

For those of us that invest in global stock markets, we do so with the expectation that we will make money in the medium to long term. A global approach gives portfolio managers the flexibility to pursue what they believe to be the best investment opportunities in the world and provides an important source of portfolio diversification in the process. However, dividends can also have a significant impact on returns and the reinvestment of these dividends within a fund structure can be of benefit to a portfolio.

The Zurich Dividend Growth fund was launched in July 2005, to meet client demand for an equity strategy with a focus on dividends. Performance has been strong for the fund, with an annualised performance of more than 7% over almost 18 years or 235% compound return.*

Screen, select, construct

The fund is managed by Zurich Investments using a model-based process which is separate from the standard active management process for our other internal funds that goes through a rigorous screening and stock identification process. The initial screening covers over 10,000 global companies and identifies those with a higher-than-average dividend yield amongst their sector group in their regional market. It is crucial to identify and exclude companies where the dividend yield is inflated due to a falling share price as a result of poor fundamentals. Thus, the focus of the fund is not necessarily on very high dividend paying companies, rather it is on those with an above average yield plus the capacity to pay and sustain a higher dividend yield over time. The Dividend Growth Fund is focused on identifying sustainable dividend paying shares with the ability to grow that dividend in the future.

The fund manager looks for opportunities worldwide, searching for companies with the following characteristics:

• A higher-than-average dividend yield amongst their sector group in their regional market;
• Payout ratios that have the ability to grow, and the capacity to sustain higher dividend yields over time; and
• High and stable return on shareholder equity.

This process reduces the number of stocks down to approximately 150, and the fund manager risk overlay can narrow it further. This is an important step in the process, which identifies stocks that may need to be excluded for qualitative reasons. The model is consistently applied to ensure stability; however, it has been assessed and refined at several points since the fund’s inception.

The screening process takes place on a regular basis. To reduce unnecessary turnover in the fund, the criteria are set such that it is more difficult to get into the fund initially than it is to remain within the fund once previously selected for inclusion.

Diversification

As the Dividend Growth Fund is a very different income focused model, from our standard active process, it has a different outcome and holdings and thus can add diversification when used in addition to other Zurich Life funds such as Active Asset Allocation (AAA) or the Prisma multi-asset fund range.

Dividend growth into the future

Zurich’s model helps identify stocks that have the potential to grow their dividend and is not focused on only equities that are considered ‘defensive’. It is important to note that not all dividend stocks are defensive by nature, and dividend growers tend to be more cyclical. By having a model that uses a number of different metrics, and an element of manager overlay, the fund is well-positioned to identify stocks that have the potential to participate further in the global economic recovery.

Stocks providing a good dividend yield continue to offer an opportunity to provide a strong income stream.

As part of a wider portfolio the Dividend Growth Fund aims to help provide better investment outcomes for both you and your clients. For more information visit zurichbroker.ie or speak to your Zurich Broker Consultant.

*Source: Zurich Life, February 2023. Annual management charges (AMC) apply. Returns are based on offer/offer performance and do not represent the return achieved by individual policies linked to the fund.