From day one, the month of August this year lived up to its reputation as the silly season. No sooner had the US government allayed market fears of default on its debt than investors found plenty more to worry about in the Eurozone crisis and the plethora of economic data that stock markets feed on. Perhaps this reaction was not so silly, as there are some real problems out there, but are we not told as individual investors to regard equities as a long-term, five-year-plus asset class?
If we hold shares for five years or more, there will be many good days and many bad days but we all hope and tend to expect that the long-term trend will be upward. So, the daily and weekly gyrations of the markets should not cause too much anxiety, whilst any more prolonged periods of weakness can provide opportunities to add fundamentally sound companies to investment portfolios at attractive prices that can provide rather nice dividend yields.
Indeed, in this era of ultra-low interest rates, many more individual investors have come to regard equities as providers of a healthy income stream that can beat many deposit rates. The fluctuating nature of equity values should not be overlooked as capital is always at risk, but the dividend flow from a well-balanced selection of equities can be useful and not subject to the same volatility as share prices.
In most equity markets, dividend payouts represent a cautious proportion of corporate earnings. This enables management to plough some profits back into the company whilst also maintaining or progressively increasing dividend rates (usually ‘pence per share’ for UK companies) despite short-term variations in financial performance. This combination of corporate and dividend growth has helped fuel the long-term performance of equities.
Exceptionally, during the recession, some companies in telecoms, oil and other sectors did cut or even suspend dividend payments. The good news is that normal service is being resumed at many companies across the sectors (though some bank share dividends remain suspended) and dividend growth has been impressive. According to Capita Registrars’ latest UK Dividend Monitor Report, underlying dividends have risen for five consecutive quarters. A reason to be cheerful, perhaps.
You should not use past performance as a suggestion of future performance. It should not be the sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise. You may not get back the amount you invested.