Skip to main content


Tapping the Power of Global Equity Dividends

What we seek—and avoid—in pursuit of consistent returns.

Key Insights

  • We believe that investing in a portfolio of high‑quality, durable dividend payers and dividend growers can drive consistent risk‑adjusted returns over market cycles.
  • Identifying the opportunities and avoiding the traps in dividend investing requires active stock selection and a rigorous, disciplined investment approach.
  • We hunt for stable, established companies with the fundamentals to support sustainable dividend growth. High dividend yields that look fragile are a red flag to us.

Dividend stocks have regained favor with investors amid sharp market volatility over the past 12 months. In particular, compressed valuations for once buoyant growth stocks have highlighted the role of dividends as a potential cushion for returns.

We believe that dividend investing deserves greater attention, and not just in this challenging market environment. History and our experience suggest that, over market cycles, a select group of high‑quality, durable dividend payers and dividend growers can deliver consistent risk‑adjusted total returns.

Why Dividends Matter

Dividends historically have been a powerful engine for total returns, especially when that income was reinvested over time. Since 1970, compounded dividends have accounted for over 70% of global equity returns (Figure 1).

Dividend Compounding Is Too Strong to Ignore

(Fig. 1) Total return composition of the MSCI World Index

Total return composition of the MSCI World Index graph

For illustrative purposes only, not representative of an actual investment.
As of January 31, 2023.
Source: T. Rowe Price calculations using data from FactSet Research Systems Inc. All rights reserved (see Additional Disclosures).

Zooming in on the last 20 years, dividends have composed a prominent part of total returns across major regions in both developed and emerging markets (Figure 2).

The Long‑Term Power of Dividends Is Clear Across Regions

(Fig. 2) 20‑year return breakdown for major regions

20‑year return breakdown for major regions chart

Past performance is not a reliable indicator of future performance.
As of December 30, 2022.
Based on MSCI China Index, MSCI Australia Index, MSCI USA Index, MSCI AC Asia ex Japan Index, MSCI Emerging Markets Index, MSCI World Index, MSCI AC World Index, MSCI China A Onshore Index, MSCI Europe Index, MSCI Japan Index, respectively.
Source: T. Rowe Price calculations using data from FactSet Research Systems Inc. All rights reserved (see Additional Disclosures).

The importance of dividends is especially evident in markets that tend to have stronger equity income cultures. We see this in Europe, where dividends have contributed to more than 46% of total returns since 1999 (Figure 3).

Dividends Explain Large Differences Between Price Returns and Total Returns in Income‑Oriented Europe

(Fig. 3) Indexed total returns for MSCI Europe Price Index and MSCI Europe Total Return Index

Indexed total returns for MSCI Europe Price Index and MSCI Europe Total Return Index graph

Past performance is not a reliable indicator of future performance.
As of January 27, 2023.
Source: T. Rowe Price analysis using data from Bloomberg Finance L.P. (see Additional Disclosures).

That importance is even clearer with sustained dividend growth. As an example, the S&P 500 Dividend Aristocrats Index, which represents over 60 S&P 500 companies with 25 consecutive years of dividend increases, has outperformed the S&P 500 Index by more than 75% since 1989 (Figure 4). By identifying companies with the ability to sustain and grow dividends and taking an active, global approach, we believe we have the potential to drive consistent long‑term returns.

Return Differences Are Even More Pronounced With Sustained Dividend Increases

(Fig. 4) Indexed total returns for S&P 500 Dividend Aristocrats Index and S&P 500 Index

Indexed total returns for S&P 500 Dividend Aristocrats Index and S&P 500 Index graph

Past performance is not a reliable indicator of future performance.
As of January 27, 2023.
Source: T. Rowe Price analysis using data from Bloomberg Finance L.P. (see Additional Disclosures).

From our perspective, in addition to helping drive returns, dividends are a barometer of shareholder value. Dividends can indicate companies’ commitment to shareholder returns. That commitment is typically backed by managements’ confidence in the long‑term strength and cash‑generating ability of their business models.

Moreover, we see dividends reflecting management discipline. Building a strong track record of dividend payouts understandably calls for sound judgment on capital allocation and the management of leverage. Determining the amount of cash to set aside for shareholder distributions and future investments and the optimal level of debt to take on are critical decisions to get right.

What Yields Do Not Show

But what investors commonly overlook is this: High dividend yields by themselves do not promise strong total returns. More crucial are the sustainability of the dividends and the business fundamentals supporting them. Some companies that pay hefty dividends may simply have limited growth opportunities and few uses for cash on hand. Also questionable are capital‑intensive companies that overstretch themselves with high payouts to entice investors.

These examples underscore the danger of compromising company quality in exchange for high dividend yields. Such companies may struggle to maintain their dividends over time or attain the earnings growth needed to drive share price appreciation. Taken together, we would be wary of the total return profiles of these stocks.

Similarly, avoiding low‑yield stocks without a careful evaluation of the companies’ prospects comes with pitfalls. Low yet growing dividends may point to companies that are on a path of earnings expansion, with cash flows that are starting to exceed their capital expenditure needs. These stocks may ultimately generate sizable total returns through dividends and earnings growth combined. Understanding their commitment to shareholder returns and emphasis on dividends is especially important when assessing these companies.

Selecting Dividend Payers and Dividend Growers

In short, stock selection is key. We believe there is a far better chance of achieving consistent risk‑adjusted total returns over the long run by investing in durable dividend payers and dividend growers. Certain characteristics stand out to us in our search for these companies.

  1. High‑quality fundamentals: Foremost on our radar are strong company fundamentals that support dividends. Healthy free cash flow growth, compounding earnings, and robust returns on invested capital are among the features that we look out for.
  2. Attractive growth potential: Companies should also possess what we think are attractive growth prospects. Enduring competitive advantages, favorable industry structures, and healthy end markets often enable them to get ahead.
  3. Capital allocation discipline: We like management teams with established track records in allocating capital and building solid balance sheets, including the sound use of leverage even in tough market conditions.
  4. Commitment to shareholder returns: It is vital that management teams have well‑articulated dividend and share buyback policies that are in keeping with the companies’ financial health and strategy.

Put in another way, we seek high‑quality earnings compounders that are well positioned to pay or grow dividends over time, while avoiding low‑quality companies that pay unsustainable dividends. This framework guides our overall approach in assessing companies across the dividend yield and capital intensity spectrums (Figure 5).

Our Stock Selection Approach Is Guided by a Proprietary Framework

(Fig. 5) Companies we like and companies we avoid

Companies we like and companies we avoid graphic

For illustrative purposes only. This is not intended to be investment advice or a recommendation to take any particular investment action.

Companies that we seek include those that have been growing cash flow and dividends in industries benefiting from structural tailwinds. Amphenol, for example, is exposed to the rise of electrification in the automotive and industrial markets that it serves. The company is one of the world’s leading suppliers of connectors used in electric vehicles, heavy equipment, and many other areas, and electrification has broadly led to increased connector content per application. Over the past five years, management has been committed to returning a significant portion of free cash flow to shareholders.1

Conversely, companies that appear less compelling include high dividend yielders that face secular business challenges. Consider tobacco companies, whose generous dividends have traditionally drawn income‑seeking investors. Nonetheless, the outlook for these companies has weakened amid mounting competition from new nicotine products and growing ESG concerns.2

We would also be cautious about companies that pay either no or a very low dividend yield due to their tendency to hoard cash on the balance sheet. These companies are often poor capital allocators. Companies with large capital expenditures for growth, resulting in limited free cash flow generation, would also not meet our criteria. Young technology companies are likely to fall into this category.

Pursuing Consistency

In our search for consistent total returns across bear and bull markets, our conviction lies in a distinct group of high‑quality companies with the potential to pay or grow dividends sustainably. To draw a parallel with the famous fable “The Tortoise and the Hare,” we would not expect these stocks to race ahead like the hare and attain top‑notch returns in any given year—a rare feat for long‑term investments. Stocks we like tend to be more like the tortoise, driving steadier returns through earnings growth and dividends with the goal of providing long‑term capital appreciation.

Finding companies with this risk/reward profile requires investors to look beyond headline dividend yields and delve into business fundamentals. By conducting rigorous stock‑by‑stock analysis, we believe we are able to construct a portfolio of the best equity income ideas from our global opportunity set.

Risks—the following risks are materially relevant to the portfolio:

Country risk (China)—all investments in China are subject to risks similar to those for other emerging markets investments. In addition, investments that are purchased or held in connection with a QFII license or the Stock Connect program may be subject to additional risks.

Country risk (Russia and Ukraine)—in these countries, risks associated with custody, counterparties and market volatility are higher than in developed countries.

Currency risk—changes in currency exchange rates could reduce investment gains or increase investment losses.

Dividend Investing—Dividends are not guaranteed and are subject to change.

Emerging markets risk—emerging markets are less established than developed markets and therefore involve higher risks.

Small and mid-cap risk—stocks of small and mid-size companies can be more volatile than stocks of larger companies.

Style risk —different investment styles typically go in and out of favour depending on market conditions and investor sentiment.

General Portfolio Risks

Capital risk—the value of your investment will vary and is not guaranteed. It will be affected by changes in the exchange rate between the base currency of the portfolio and the currency in which you subscribed, if different.

ESG and Sustainability risk—may result in a material negative impact on the value of an investment and performance of the portfolio.

Equity risk—in general, equities involve higher risks than bonds or money market instruments.

Geographic concentration risk—to the extent that a portfolio invests a large portion of its assets in a particular geographic area, its performance will be more strongly affected by events within that area.

Hedging risk—a portfolio’s attempts to reduce or eliminate certain risks through hedging may not work as intended.

Investment portfolio risk—investing in portfolios involves certain risks an investor would not face if investing in markets directly.

Management risk—the investment manager or its designees may at times find their obligations to a portfolio to be in conflict with their obligations to other investment portfolios they manage (although in such cases, all portfolios will be dealt with equitably).

Operational risk—operational failures could lead to disruptions of portfolio operations or financial losses

Additional Disclosures

The “S&P 500 Index” and “S&P 500 Dividend Aristocrats Index” are products of S&P Dow Jones Indices LLC, a division of S&P Global, or its affiliates (“SPDJI”), and have been licensed for use by T. Rowe Price. Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by T. Rowe Price. T. Rowe Price products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index and S&P 500 Dividend Aristocrats Index.

MSCI and its affiliates and third party sources and providers (collectively, “MSCI”) makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI. Historical MSCI data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.


This material is being furnished for general informational purposes only. The material does not constitute or undertake to give advice of any nature, including fiduciary investment advice, and prospective investors are recommended to seek independent legal, financial and tax advice before making any investment decision. T. Rowe Price group of companies including T. Rowe Price Associates, Inc. and/or its affiliates receive revenue from T. Rowe Price investment products and services. Past performance is not a reliable indicator of future performance. The value of an investment and any income from it can go down as well as up. Investors may get back less than the amount invested.

The material does not constitute a distribution, an offer, an invitation, a personal or general recommendation or solicitation to sell or buy any securities in any jurisdiction or to conduct any particular investment activity. The material has not been reviewed by any regulatory authority in any jurisdiction.

Information and opinions presented have been obtained or derived from sources believed to be reliable and current; however, we cannot guarantee the sources' accuracy or completeness. There is no guarantee that any forecasts made will come to pass. The views contained herein are as of the date noted on the material and are subject to change without notice; these views may differ from those of other T. Rowe Price group companies and/or associates. Under no circumstances should the material, in whole or in part, be copied or redistributed without consent from T. Rowe Price.

The material is not intended for use by persons in jurisdictions which prohibit or restrict the distribution of the material and in certain countries the material is provided upon specific request.  

It is not intended for distribution to retail investors in any jurisdiction.

Canada—Issued in Canada by T. Rowe Price (Canada), Inc. T. Rowe Price (Canada), Inc.’s investment management services are only available to Accredited Investors as defined under National Instrument 45-106. T. Rowe Price (Canada), Inc. enters into written delegation agreements with affiliates to provide investment management services.

© 2023 T. Rowe Price. All rights reserved. T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks or registered trademarks of T. Rowe Price Group, Inc.

Previous Article

March 2023 / MARKET EVENTS

U.S. Bank Failures: What Happened and What We're Watching
Next Article

March 2023 / FIXED INCOME

Cutting a Path