Dunedin Income Growth (DIG ) manager Ben Ritchie says dividends have generated the bulk of the UK’s long-term stock market returns but he cautions against assuming companies with the biggest shareholder payouts are the best ones to own. They’re just as likely to cut their dividends and see their share prices fall.

This is the first excerpt from our virtual event with Dunedin Income Growth last week. If this whets your appetite, you can watch the whole Big Broadcast.

Can’t watch now? Read the transcript

Ben Ritchie:

The first chart, if we look here on the left, is the dividend yield. It shows you how the total return to investors in different markets has been delivered over the last 40 years. What you can see in the UK market is that the dividend part of the total return – this is in real terms, you’ve got to add inflation on top of that – has almost entirely come from dividend distributions. Very small amount of growth that’s come from that.

If you look at some of the other markets. The US, France, Germany, Japan, Canada, actually, there’s been much more that’s come from the growth element. It’s roughly balanced 50/50, which to my mind makes a little bit more sense. The lesson that many people draw from this is that you’ve got to own high-yielding equities because high-yielding equities give you the dividends. Dividends make up most of the total return, therefore that makes sense.

If you look to the chart on the right-hand side, what that shows you is that high yields rarely actually translate into high dividends.

If you buy companies with high dividends, they’re almost certain or very likely to cut their dividends. So, companies with 16% dividend yields actually turn out to really only have 6% realised yields. You can see the gap between the dark blue line and the turquoise line. It gets bigger as the yields go up.

I think that’s really important because we think that you need to balance both income today with growth in that income and the capital growth that companies can deliver.