What does a higher inflation world mean for dividends?
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What does a higher inflation world mean for dividends?

We look at the impact of higher inflation on dividends and how this 'new normal' will affect our expectations and investment thesis going forward

  • Heightened inflation will make it more complicated to identify sustainable dividend growers. We believe a focus on free cash flow margin resiliency will be key

  • Attractive dividend growth in 2022 should be followed by a healthy but more pedestrian 2023 as many cyclical areas pass peak earnings

  • The big question is what does an increased inflationary environment mean for dividends over the medium term?

2022 saw the return of inflation. What we haven’t seen is a shift in companies’ dividend policies, which is understandable given their long-term nature. However, we believe we are now likely living through an extended period of higher inflation driven by deglobalisation, energy transition and unfavourable demographics given a rising dependency ratio. In this environment we think many businesses will have to shift their capital return expectations. We are adjusting our expectations to this new normal with the aim of avoiding companies with unsustainable dividend targets.

We believe an ability to show resilient free cash flow margins will be vital in identifying sustainable dividend growers. Consequently, we will be laser focused on ensuring our portfolio companies have pricing power and an ability to manage cost structure and capital investment while operating with a reasonable debt load. This discipline is more important than ever with dividend sustainability more greatly prized in an inflationary environment.

One area we are increasingly cautious about is the US telecom tower sector (and highly levered real estate more generally). US towers have benefited from fixed price escalators of 3% a year1 and falling interest costs, which have driven attractive free-cash-flow (FCF) growth. While the fixed rate pricing now looks less favourable, it can still drive positive operating cash flow growth given limited cost inflation. However, the sector’s high leverage with company bond yields climbing a few hundred basis points provide an ongoing FCF headwind that makes their dividend growth targets look challenging.

Low-cost operators in the energy and mining sector, however, look relatively attractive. Generally, commodity prices have kept pace with inflation while premium assets and strong cost control have led to low break-even price levels. Capital discipline and balance sheet leverage, meanwhile, have improved over the past decade and many players are well positioned for a shift to a greener economy. These business models look more attractive now than when inflation was low and fixed price subscription business models were valued above all else.

A focus on sustainable dividends is vital in income investing. The return of inflation has only reinforced our preference for companies that offer sustainable income and growth, as we believe this is the best approach for total return through the cycle. However, we recognise that the dividend aristocrats – those companies that have the ability to raise dividends every year – will be quite different. Over the past decade, US towers were ideal dividend stocks but this seems unlikely to now be the case.

2022 dividend review

2022 was a good year for dividends, climbing a little over 7% on average globally in a period that saw global GDP crimped by the war in Ukraine and China’s zero-Covid policy (Figure 1 right-hand side). Defensive growth sectors such as consumer staples, utilities and healthcare delivered mid-single digit dividend growth, with the companies in these sectors generally able to pass on inflation through a mix of high margins, pricing power and pass-through mechanics. At the same time, some of the more cyclical sectors such as consumer discretionary and industrials grew dividends in the low double-digit range with companies helped by a mix of recovering end-markets, helpful energy prices and still depressed post-pandemic dividends. At the other end of the spectrum, the materials sector struggled with commodity prices impacting margins for many firms, and the communications sector saw AT&T cut its dividend as it spun off Warner Media2.

Figure 1: Dividend growth by sector - 2023 and 2022
Dividend Growth by sector - 2023 and 2022

Source: Jefferies & FactSet, January 2021. Note: Bottom-up aggregated with free float adjustment based on current MSCI universe.

A warm welcome to 2023!

The outlook for dividends is positive in 2023. Expectations are for a rise of 4% globally on average – a healthy if more pedestrian growth rate than we have seen in the past. Dividends from energy and materials sectors face pressure from commodity price movements given dividend pay-out ratio policies at many companies. Financials and consumer discretionary sectors offer good growth, and much of this remains a catch-up in dividend payments from the pandemic period whether due to depressed end markets or restraint in returning capital to shareholders. Once again, defensive growth sectors should generate mid-single digit dividend growth. 

28 March 2023
Jonathan Crown
Portfolio Manager
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What does a higher inflation world mean for dividends?

1Columbia Treadneedle analysis, February 2023
2Mention of specific funds is not a recommendation

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港 有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.
In the UK issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L2661 Luxembourg, Grand Duchy of Luxembourg.
In the Middle East: this document is distributed by Columbia Threadneedle Investments (ME)
Limited, which is regulated by the Dubai Financial Services Authority (DFSA). This document is
intended to provide distributors with information about Group products and services and is not for
further distribution. The information in this document is not intended as financial advice and is only
intended for persons with appropriate investment knowledge and who meet the regulatory criteria
to be classified as a Professional Client or Market Counterparty and no other Person should act
upon it.
In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is an advertising document.
This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.
In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.
In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This document has not been reviewed by the Monetary Authority of Singapore.
In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港 有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the the Companies Ordinance (Chapter 622), No. 1173058.
In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.
In the UK issued by Threadneedle Asset Management Limited, registered in England and Wales, No. 573204. Registered Office: Cannon Place, 78 Cannon Street, London EC4N 6AG. Authorised and regulated in the UK by the Financial Conduct Authority.
In the EEA: Issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Sociétés (Luxembourg), Registered No. B 110242 44, rue de la Vallée, L2661 Luxembourg, Grand Duchy of Luxembourg.
In the Middle East: this document is distributed by Columbia Threadneedle Investments (ME)
Limited, which is regulated by the Dubai Financial Services Authority (DFSA). This document is
intended to provide distributors with information about Group products and services and is not for
further distribution. The information in this document is not intended as financial advice and is only
intended for persons with appropriate investment knowledge and who meet the regulatory criteria
to be classified as a Professional Client or Market Counterparty and no other Person should act
upon it.
In Switzerland: Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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