Investing in companies with attractive dividend payouts, also known as a form of income investing, aims to pick companies that provide a constant and reliable stream of income in the form of dividend payments. It is especially suitable for investors, which look for a combination of recurring income and upside potential from stocks. Depending on the cycle, but on average, dividend payments in Europe account for a large part of long-term equity performance and are therefore an important contributor to total return. In addition to that, the dividend component tends to be less volatile than the underlying price movements of the share, which improves the defensive qualities of an investment.

Attractiveness in a low yield environment

The demand to pursue an income investing approach has considerably risen over the past years, mainly driven by a continuously falling yield environment. The relative attractiveness of dividend yields over corporate bond yields, represented by the spread between those two figures, has reached record highs in late 2016 but remains in elevated territory since then. To include a forward-looking component, it is worth to take a look at the expected dividend yield for the next twelve months, which is even above what we have seen in the past.

Positive signalling

Another reason, which favours companies with an attractive dividend policy comes from the field of Behavioural Finance and is known as "dividend signalling". By raising the absolute dividend paid out, management signals confidence for the future course of the business, which has a lasting positive effect on the share price. Investors perceive this kind of signal often as more reliant than actual communicated targets on sales and earnings, which often prove to be less reliable. Companies with constant dividend growth tend to outperform the market with a lower average volatility. It is important to know that the opposite is true as well, i.e. when a management announces a dividend cut or a complete omission of the dividend.

Improved corporate governance

A transparent and progressive dividend policy can have a certain disciplining effect on the management of companies, especially if they follow an active acquisition strategy, since the freely available cash flows required for distributions must be generated on a regular basis. There is empirical evidence, which proves a positive relationship between good corporate governance and the distribution of dividends.

10 high dividend paying stocks we like

1. Munich Re (4.49%)
2. Allianz (4.28%)
3. Royal Dutch Shell (6.05%)
4. Total (5.23%)
5. Sanofi (3.84%)
6. AstraZeneca (3.33%)
7. Vinci (3.25%)
8. BNP Paribas (6.84%)
9. Deutsche Post (4.08%)
10. Renault (5.72%)

Disclaimer: This article was issued by Kristian Camenzuli, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.