Dividends better than profits as share price measure, study finds

Dividends have been a more reliable indicator of share price growth over the last decade than profits, according to research from Henderson Far East Income (HFEL).

On a global level, the correlation between payout and share price growth was more than twice as high as the correlation between profit and share price.

In North America, the difference was significantly noticeable, with dividends found to be six times more reliable as an indicator of share price growth than profits.

The findings were also particularly marked in Asia where the association between dividends and share prices was two and a half times stronger than between profits and share prices.

Only the UK showed a strong relationship between profits and share prices, but dividends still proved a slightly better measure of share price growth.

In Europe ex UK, the relationship was at a more even keel, with dividend growth only a fraction beneath profits as an indicator of share price growth over the last ten years.

Mike Kerley, manager of HFEL, said: “A company can only sustain its dividends if it is both profitable and generating cash, and it can only sustain dividend growth if profits and cash flow grow over the longer term. This helps explain why a focus on profits alone is less reliable when thinking about long-term returns.”

Asia-Pacific has seen much faster dividend growth than the rest of the world, according to the report.

Since 2009, payouts in the region excluding Japan have more than tripled, rising 216% by the end of Septmber – an average annual increase of 12.9%.

©2019 funds europe

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