Investors should seek ‘companies that grow and pay’ amid volatility

Investors seeking stability and outperformance over the long-term have been encouraged to turn to companies still issuing dividends, according to analysis from GSFM partner Epoch Investment Partners.

Epoch portfolio manager, Kera Van Valen, said investors with a portfolio of high-quality companies that have a strong record of “sustainable” cash flow and have continued to give back to shareholders through dividends, share buybacks and debt reduction show all the signs of delivering long-term outperformance

“Companies with consistent, well-managed dividend policies signal financial health, disciplined capital allocation, and a commitment to returning value to shareholders, even during uncertain periods,” she said.

“History shows that companies with stable and growing dividends tend to outperform companies that either don’t pay a dividend or have an inconsistent dividend policy resulting in cuts or reductions to dividends.”

This blended approach comes as investors continue to hold firm amid geopolitical tension-fuelled market volatility, and is expected to provide more downside protection in the long-term.

“This strategy puts investors in a much stronger position to gain long-term risk-adjusted returns, allowing them to weather volatility and have a smoother ride through the market cycle,” Van Valen said.

“Regardless of the somewhat uncertain global economic outlook, due to the obvious geopolitical factors, we believe the dividend outlook is strong, and the current rate environment and strength in cash flows give corporates no reason to abandon sound capital allocation practices.”

Van Valen also cited Coca-Cola Europacific Partners (CCEP) and Deutsche Telekom (DTE) as global companies that have paid their investors a “strong and sustainable cash flow”.

“CCEP sustains its cash flow by maintaining efficient product distribution and having a differentiated pricing architecture, giving consumers the ability to buy its products at different price points,” she said.

“DTE, on the other hand, is a good example of how debt reduction can be used to increase equity holders’ claims on company cash flows.

“Ultimately Deutsche Telekom was able to increase its dividend rate and initiate share repurchases, enabling the company to regain majority ownership of T-Mobile.

“T-Mobile was then able to initiate a standalone dividend, returning significant cash back to the parent company and further benefitting DTE shareholders.”