How you can take advantage of a "robust" dividend paying environment

The growth of free cash flow and the intelligent use of that cash flow (i.e., returning large chunks to shareholders) represent the best predictors of long-term shareholder return, according to New York-based Epoch Investment Partners. 

Subsequently, Epoch's philosophy centres around finding global companies with sound capital allocation policies, strong cash flow growth, and an emphasis on returning cash to shareholders in the form of dividends, share buybacks, and debt reduction. This is what it collectively refers to as "shareholder yield." 

In July this year, I spoke with Portfolio Manager for the Epoch Global Equity Shareholder Yield Fund (Hedged), Kera Van Valen, about the Great Rotation that was happening at the time, and the impact of AI on cash flow generation. 

The wire, available below, was hugely popular, so I recently spoke with Van Valen again for a Rapid Fire, reviewing the year that was in 2024, and the outlook for 2025. 

Equities

Dividends and cash flow are key to long-term returns. Here’s 2 stocks that fit the bill

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What has been the most important theme for global equities in 2024?

Thematically, it would be difficult to discuss this year without talking about AI. 

The technology has dominated headlines and investor interest for much of the year, and the stocks and industries most central to the story have been rewarded significantly from sustained mania surrounding the theme. 

In our Global Equity Shareholder Yield (GESY) portfolio, we've benefitted primarily through our exposure to the semiconductor space, as the industry has been one of the most crucial early enablers of AI proliferation. It's still early days for AI, and we expect to see more segments of the economy impacted as the technology matures. 

Another key story this year for our strategy has been the volatility present in global markets. Although equities have risen year to date, it has been a somewhat choppy path upwards, and that intra-year volatility has enabled the strong performance we've seen from the GESY portfolio this year. 

As a defensively positioned strategy, we expect to generate outperformance during declines while capturing significant upside during rallies, which is largely how the year has gone for us thus far.

What has been the most surprising development for global equities?

One surprising development for markets that carried over from 2023 is the sustained resilience of the U.S. economy despite a tighter monetary policy environment. 

Unemployment data has thus far remained tame alongside moderating inflation and resilient corporate earnings, and the year has seen recession fears erode materially as we appear to be in for a soft landing. 

There was concern earlier in the year that weakening earnings were being obfuscated by extreme concentration in earnings strength within the "Magnificent Seven" tech giants, but the US summer saw the beginning of some healthy broadening in the market. 

GDP looks set to beat expectations for the second year in a row, and with the Fed having now begun easing, it is hard to make a case for near-term pessimism. That said, the path forward is not set in stone, and supportive policy for the labour market will need to be carefully balanced against the risk of reigniting inflation.

What are you most excited about in 2025?

We believe that the outlook for a shareholder yield focused portfolio is very bright right now. 

The dividend environment is robust, as the current strength in cash flows gives corporates no reason to abandon sound capital allocation practices in the near term. 

Share repurchase activity has been strong, and we expect that to continue. Interest rates are set to continue coming down; however, we view it as unlikely that they return to the highly stimulative levels they sat at for years before COVID. 

Over time, a more normalised rate environment should drive balance sheet deleveraging and discourage frivolous investments by corporates, bringing debt reduction more notably back into the shareholder yield picture. In addition, we're continuing to see our opportunity set expand as companies embrace a more balanced approach to returning cash to shareholders.

What is the biggest risk heading into 2025?

While we are cautiously optimistic about the economy and prospects for the market going forward, there are still many potential catalysts for volatility lingering out there. 

Inflation has been moderating, but should it reassert itself or should the lagged effects of monetary tightening begin to bite more acutely, there exists the possibility of significant policy error by central banks around the world. 

On the geopolitical front, multiple armed conflicts have erupted globally with little end in sight. Russia's incursion to Ukraine continues to stoke adversarial posturing between West and East, while escalation between Israel and Iran threatens to inject volatility into global energy markets. 

Even outside of direct military conflicts, broadly rising geopolitical tensions, such as those between the U.S. and China, continue to drive a trend of deglobalisation and realignment of global supply chains.

What is the market not paying attention to that could have an outsized impact in 2025?

Following the U.S. presidential election, we've seen "animal spirits" take hold in equity markets, as investors digesting a republican sweep appear to be front-loading expected growth from pro-business policy and de-regulation. 

The initial impulse from markets has been unsurprising to us, but in our view, may not be wholly pricing much of the uncertainty accompanying some suggested economic actions from the incoming administration, especially the use of tariffs. A lack of clarity regarding the full scope of what will be implemented over what timeline, or how much rhetoric on the subject is being utilised as a bargaining tactic has made forecasting market impacts difficult at present.

Enthusiasm likely hinges at least in part on memories of the extended rally that followed the last republican victory in 2016, but the geopolitical, economic, and market environment of today is markedly different than when the party last came into power. 

We remain cautiously optimistic on the path forward for the economy and for equities, but in our opinion the wide array of possible outcomes is something that investors should be considering while managing risk exposures heading into next year. 

Managed Fund

Epoch Global Equity Shareholder Yield (Unhedged) Fund

Global Shares

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Managed Fund

Epoch Global Equity Shareholder Yield Fund (Hedged)

Global Shares

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