Shifting Focus from Expansion to Revenue: The Increasing Appeal of Dividends among International Investors in Volatile Economies

Shifting Focus: Global Investors Embrace Dividend-Focused Strategies Amidst Economic Uncertainty

In a significant shift, global investors are reallocating their portfolios from growth-seeking sectors to more stable, income-producing assets. This transition is not just a response to market stress, but also a shift in perceptions of risk and return expectations.

Economies are now rewarding stable cash flows and careful capital allocation more than in the past. However, this move comes with its own set of challenges. Dividend cuts can occur in an economic downturn and may lead to declining earnings, share price depreciation, and impact both income and principal value.

Inflation-adjusted income is an important consideration. A strong nominal yield could be meaningless if inflation rises faster than payout increases, reducing purchasing power over time.

Investors should be cautious about overconcentration in traditional "safe" sectors like utilities, consumer staples, and real estate. These sectors may face regulation, interest rate, and commodity price risks.

A strategy that has gained prominence among international investors is focusing on sustainable forestry investments in established markets like Scandinavia, North America, and Oceania. This approach offers stable returns, risk diversification benefits, and alignment with long-term sustainability goals.

Central banks, including the U.S. Federal Reserve and European Central Bank, are signaling a "higher-for-longer" approach to interest rates. This could impact the returns from dividend-paying stocks.

Despite these challenges, dividend-paying stocks are regaining appeal due to their ability to provide income stability, defense against loss, and real returns in an uncertain environment. Stocks with a history of dividend growth tend to provide better long-term inflation protection and more stable real returns.

The first half of 2025 saw global dividend-focused funds attracting US$23.7 billion in inflows, the strongest since 2022. Dividend-focused ETFs delivered a total return of 26% in the same period, compared to the MSCI World Index gain of roughly 8.5%.

However, a high yield may indicate distress or unsustainable payout ratios in high-yield stocks. Rising interest rates, persistently high inflation, and increasing geopolitical risk have altered the assumptions that facilitated growth-focused investing.

Dividend strategies are not without risk, and investors must select stocks carefully to avoid dividend yielding, or concentrated risks by investing in poor performing sectors. As the global economy navigates through economic and geopolitical uncertainty, tenuous earnings outlooks, and high volatility in markets, investors should invest in companies with reliable and dependable growth distributions to maintain purchasing power.

Equity analysts are downgrading their outlooks for a more challenging environment, and global GDP forecasts are trending downward. Amidst these challenges, the allure of stable, income-producing assets remains strong.

Shifting Focus from Expansion to Revenue: The Increasing Appeal of Dividends among International Investors in Volatile Economies