Sentiment on the markets is negative, driven by a raft of political upsets that are weighing increasingly on economic growth and have led to a flight into supposedly safe havens. With losses of around 16%, this has been the worst year for German equities since 2008. US tech stocks were the only area in the equity sector to have generated a significant profit in 2018. It will not be possible to resolve many of the problems on an ad hoc basis, so that companies will be up against a challenging environment in 2019 as well. However, the price correction does appear to be overdone. Although the pace of growth is easing, economic output will continue to rise in the large countries.
As we see it, there is no doubt that the profit warnings of recent months and persisting uncertainties will impact on the dividend distributions. DAX dividend expectations for 2019 have already been lowered by 6% since September. On the whole, however, we believe that company profits and dividends will rise slightly overall in 2019. Given that we continue to face considerable uncertainties, we have examined the performance of dividend distributions over the last 50 years. During the economic downturns from 1970 onwards, dividend distributions were reduced by 29%, 44% and 23% at worst in Germany, Europe and the US respectively. The dividends were therefore much more stable than the companies’ profit development.
The sharp slump in prices has recently led to a marked increase in dividend yields. The DAX and Euro Stoxx 50 promise attractive yields of 3.7% and 4.1% respectively, which is roughly 10% above their historical averages. However, it is all the more important in the current environment to invest in sustainable dividend payers. We therefore do not recommend selecting stocks with the highest returns, opting instead for those that offer the most attractive combination of sustainable dividends, valuation, business model and balance sheet quality. Our dividend aristocrats are the perfect solution to this problem.