Financial Market Update for UK expats. Education. Retirement. QROPS. Zurich Vista

Dividend and Conquer – Weekly Market Review

Review of the Markets for Week Ending 16th of March

Apple has announced it is to pay a dividend for the first time since 1995, which is good news for the tech giant’s shareholders and for the many dividend-focused fund managers that can now invest in the shares. Looking more broadly, however, to what extent does this represent a new era for dividend-paying companies and a new era for the technology sector?

Apple’s dividend announcement is part of a wider global trend for companies to return cash to shareholders. The time when mergers and acquisitions and other business investment activity were automatically deemed to create shareholder value is gone. The credit crisis exposed the weakness of many of these deals, the paucity of the due diligence and the real cost to companies. As such, it is not rewarded by the market in the way it was pre-crisis.

After a decade of stagnant markets, investors no longer want the intangibility of capital gains. They want the genuine, in-their-pocket return year-on-year that dividends provide. Markets have increasingly started to reward dividends, prompting a growing number of global companies to start paying dividends or increase existing payouts.

Increasingly cognizant of the need to please an international shareholder base, even emerging market companies are starting to pay dividends. This has facilitated the launch of global dividend strategies, one of the most popular new trends in investment.

It is increasingly clear that for income investors to restrict themselves to UK equity income creates a portfolio that is over-concentrated in a few sectors that have occasionally – for example, with BP or the banking crisis – proved toxic. Also, why would they limit themselves to lower-growth markets when it is no longer necessary?

Yet Apple’s announcement is also symptomatic of a broader maturity in the technology sector. Technology companies had traditionally been seen as exempt from the pressure for dividends because of their need to develop new products and invest in research and development.

But as Hersh Cohen, chief investment officer at Legg Mason subsidiary ClearBridge Advisors, points out, Microsoft has seen its stock rise since it raised its dividend to 2.5% while technology group Seagate has seen its share price more than double since it increased its dividend by 39%. Cohen expects Apple’s announcement to be the start of a long-term programme of dividend increases for the firm and that it will act as a catalyst for more technology companies to pay dividends.

It is a new era for technology companies, who now recognise they are not exempt from mainstream pressure to pay dividends. But it is also part of the evolution of the global investment universe – away from ‘capital growth’ towards the more tangible rewards of dividends.

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