How to profit in a low interest environment: Are dividend payments an alternative?

Thomas Meier

“In light of the low interest rate environment and ever more challenging equity and bond markets, titles with sustainable dividends provide interesting investment possibilities.”, says fund manager Thomas Meier. In order to generate attractive returns, he focuses on sustainable dividends and also applies the so-called barbell strategy.

Frankfurt am Main, 5 October 2018. Interest rates in the EU continue to be at record lows. The German Bundesbank even reported negative real returns of -0.8 percent for private households in Q1 2018. At the same time, the situation on financial markets is tense even though fundamentals are good. Geopolitical risks, fears of a trade war, rising US interest rates and the end of the ECB’s asset purchase programme are just a few of the causes.

By contrast, dividend payments in 2018 were higher than ever. In the second quarter, USD 176.5bn were distributed to shareholders by European companies (excluding the UK): a 18.7 percent increase yoy. 1 Thomas Meier, the fund manager of the MainFirst Global Dividend Stars, points out, ”Many stocks still show significant potential for dividend growth.” Yet, an important criterion that should be taken into consideration in the choice of titles, in Meier’s opinion, is dividend sustainability.

Focusing on sustainable dividend yields

A central aspect of the MainFirst Global Dividend Stars, therefore, is dividend quality: “The amount of the dividend is important, but it’s not decisive”, he explains. “We also focus on whether it has been consistently distributed, and whether the company will continue to generate profit growth over the longer term.” Share price potential is, thus, at least as important. All companies are selected on the basis of intensive analyses involving aspects like scope of activity, balance sheet structure and cashflow. “We are also especially interested in soft factors, such as whether the management has a long-term development plan”, he concludes.

The barbell strategy for a balanced investment approach

To generate attractive returns, Meier makes use of the barbell strategy, where the portfolio is balanced between mega and large caps on the one hand and small and mid-caps on the other hand. The established large caps are defensive, solid, relatively non-cyclical companies, such as consumer goods manufacturers and insurance companies that bring stability to the portfolio. To generate higher returns, this is balanced by smaller companies which tend to be family-run international niche market leaders, characteristically with a leading market position, great growth potential, strong balance sheets and profitability as well as a compelling management track record. Currently, 47.2 percent of the portfolio are invested in mega and large caps, and a similar percentage in small and mid caps (currently 48.1 percent). “This combination allows us to offer investors a more attractive risk/reward ratio”, Meier explains.