To achieve good long term returns investors must accept short term volatility as par for the course



Duggan Matthews

After a period of steadily rising stock prices market volatility has returned in 2018.  Concerned by the prospects of rising global interest rates, market speculators have rushed to sell stocks in an attempt to lock in gains from previous years. The result has been large market declines, particularly in first world markets in sectors considered to be safe and steady.

Emotions tend to run high in periods such as these. When prices are falling investors typically doubt their initial investment strategy. Sensationalist journalism and market “chatter” also add to the sense of panic, resulting in many investors moving into the safety of cash.

Maintain a long term perspective

To avoid making rash decisions in volatile times, it is advisable to maintain a long term investment horizon – from this perspective market volatility is less unsettling.

Take for example the recent experience of 3M investors. 3M is one of the world’s premier industrial companies with an enviable track record of growing dividends and shareholders’ wealth, yet over the last three months 3M’s share price is down more than 10%. At face value this may seem like a company in trouble. However, if you look at their share price movement over the last 38 years similar short term share price declines have happened many times before.

Despite these short term price dips, the average annual total return that 3M investors have enjoyed since 1980 has been 12.6%*. Thus, from a longer term perspective, those disappointing quarters were just brief setbacks in the process of long term wealth creation.

Growing dividends = growing capital

Over the long term share price growth is ultimately driven by dividend growth. As such, large declines in the share prices of companies with the ability to consistently and reliably grow their dividends typically represent very good buying opportunities. When the share price is down, investors pay a cheaper price for the same reliable and growing dividend stream.

(Source Bloomberg)

World’s best dividend payers offer good value

Since the beginning of the year, the share prices of the world’s best dividend paying companies have come under significant pressure. Although the dividend growth outlook for these stocks remains robust, prices have declined due to negative sentiment. This has caused dividend yields to rise to very attractive levels. The table below highlights the current dividend yields versus the historic averages of seven high quality and reliable dividend paying companies.

In conclusion, the world’s best dividend paying companies are currently trading on high dividend yields and thus offer good value to investors. Although current market volatility is unnerving, when viewed from a longer term perspective it is likely to represent a good buying opportunity and we remain of the view that quality global equities should be an investor’s asset class of choice.

Caption:  Duggan Matthews is an Investment Professional and Chief Investment Officer at Marriott