A decade of political manipulation of the price of money is coming home to roost.

In a recent Elite Insights video on our Elite Investor TV Youtube channel, I mentioned the 100 year Austrian government bond that was offering a massive 1.2% yield if you tied up your money for a century. Instead of laughing at it, I should have filled my boots. A couple of weeks later the yield is down to 0.77% as pension funds pile in and the price keeps rising.

For decades now, one of the cornerstones of any investment portfolio looking for yield has been dividend paying stocks and shares. You’re probably familiar with the notion that the vast majority of stock market returns over time come from re-invested dividends. But the Austrian phenomenon has also been at work here, driving up the price of companies that pay a reliable dividend and therefore reducing the absolute yield in percentage terms.

What’s interesting is that we’re fishing in a fairly small pond here. Just 1,200 companies world wide are responsible for 90% of all the dividends that get paid. Think of the thousands of ‘equity income’ funds and ETFs that will be chasing that small cohort of enterprises to justify their existence. Then there’s the pension funds and other financial institutions who invest directly. The amount going into the shares runs into trillions of dollars, and the amount paid out in dividends continues to rise. This year the payout will be $1.43 trillion, up a reasonable looking 4.2% on last year.

But it looks like there is trouble on the horizon. For forty years now the average year on year increase has been 6%, so the 2019 number looks like a drop-off of around 20% in the rate of growth. Dividend payments are up 80% in the last decade, with Asia leading the charge albeit from a very low base. America has also been a significant contributor to dividend growth, while the UK and Europe have been behind the curve.

When you dig deeper the reason for the lower overall growth percentage is the increasing number of dividend cuts by prominent global players. The car industry is a case in point, with sales going off a cliff and the enforced mover to electric cars squeezing them between declining revenue and much increased R&D spend. (Given the power cuts on 9th August let’s all go out and buy Teslas just to see how long the lights stay on…) No surprise therefore that Daimler and BMW have reduced their dividend payout in 2019.

Others have announced cuts in dividend that are not yet reflected in the statistics which only use data when payments are made. Significant players in the UK to slash dividends include Royal Mail, Marks and Spencer, Vodafone and Centrica. If you have any UK based equity fund in your pension or ISA, I guarantee that you have exposure to these stocks.

You can only hope that you also own some Rio Tinto which gave a $4.5 billion special dividend in the last quarter that put Britain’s dividend growth up to 8.6% for the quarter. But that’s a one-off unlikely to be repeated any time soon.

American dividend growth is at its lowest for two years and there have been falls in several European countries. Reasons? Trade wars, slowdowns in GDP growth and no doubt ‘Brexit uncertainty’ are given as reasons behind the falls, but the question is what can investors do about it? Seemingly not much, as share dividends continue to significantly out-perform cash and bonds.

The dilemma is one of risk management. The stock market is historically assumed to be riskier than cash or bonds and therefore expected to give a premium return. Competition for yield has driven up the prices of these 1,200 companies. What happens when the yield goes down for two reasons, one being rising shares prices and the other being board decisions to cut dividends? You’d have to assume the result would be a fall in the share price of these companies to reflect the reduced returns.

I’m loathe to predict that given the madness of current markets. But do remember that dividend producing shares are akin to buy-to-let property in that there are two elements that make up your overall return. Share price movements give you a capital gain (or loss) and dividends give you income twice a year which you can spend or reinvest. It’s possible that, after 40 years of rising dividends, we could see both the income and the share price decline in the months and years ahead.

The natural inertia of fund managers and financial advisers will not spot this trend until it has cost you a lot of money. As a member of Elite Investor Club, I know you won’t wait for that to happen. Check your holdings, monitor the price and dividend changes and be ready to re-deploy your capital if the trend changes.

In these uncertain times, even a 40 year trend can turn in a heartbeat.

Until next time

Graham