This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on March 7 - 13, 2016.

Global dividends fell 2.2% to US$1.15 trillion in 2015, according to the Henderson Global Dividend Index (HGDI) Edition 9 report released last month. Much of the decline, it says, can be attributed to the strength of the US dollar, which wiped US$104 billion off the value of global dividends last year. 

Nevertheless, it adds, underlying growth — which strips out special dividends, currency movements, index changes, and changes in the timing of payments — was an impressive 9.9%. 

The strength of the US dollar masked the excellent dividend growth in most regions, Henderson Global Investors head of global equity income Alex Crooke said in a Feb 22 press release. Last year was a good one for income investors, he pointed out.

“While dollar-based investors would have suffered, exchange rate differences dissipate over time. Since 2009, dividend payments have increased almost 60% and exchange rates have only reduced this by a marginal 2%,” he added.

The importance of dividends as a driver of total shareholder return was highlighted in 2015, when income almost entirely compensated investors for falling share prices, said Crooke. “The recent stock market volatility underlines the continued value of income as a source of return. Investing globally is beneficial, as owning a range of stocks in different countries and sectors lowers longer-term risks.”

According to the report, North American companies delivered the fastest headline growth of any region last year, paying more than two-fifths of the world’s dividends. US companies increased their dividend payout by US$50 billion, with the total rising 14.1% to US$405.4 billion. 

There were higher payouts in every sector except mining and semiconductors. Oil producers generally maintained dividends at US$31.8 billion despite the much lower oil prices. However, some companies such as Chesapeake Energy Corp cut their dividends, signalling that smaller companies could face difficulties as oil prices continue to fall this year. 

The pharmaceutical and biotechnology sector was the largest dividend payer last year, with payouts increasing 13% to US$33.1 billion. The sector’s payouts are expected to increase further this year.

Japanese companies delivered the second fastest growth in the developed world, with dividends growing 5.2% to US$51.9 billion. “Japanese companies responded to government and investor pressure to increase payout ratios, diverting cash away from corporate balance sheets and returning it to shareholders. Toyota Motor is a good example. Easily the largest payer in Japan, it returned US$6.2 billion to investors last year, having increased its yen dividend 29% year on year,” says the report.

European dividends fell 12.2% to US$204.5 billion, owing to a dramatic exchange rate effect that wiped US$41.7 billion off the value of payouts. The impact was significant because the euro was 24% lower year on year against the US dollar during the second quarter of last year, when two-thirds of European dividends are paid. Within the region, France paid out the most in dividends, with its companies distributing US$47 billion — a 15.8% decline on an annual basis.

The UK underperformed the other developed markets. Dividends fell 21.7% to US$107.1 billion, largely due to a record special dividend paid by Vodafone in 2014. Leading global dividend payers such as Royal Dutch Shell and GlaxoSmithKline maintained their dividend payout rates, while HSBC and BP increased payouts by 1.7% and 2.5% respectively. 

According to the report, the outlook for the country remains challenging in 2016 as many large multinational mining companies, which have their headquarters in Britain, have already cancelled their dividend payouts. Nevertheless, while the cuts are large, they are limited to a few companies.

“Standard Chartered, which is suffering from harsh trading conditions in emerging markets, will also be reducing dividends,” it adds.

The triple whammy of a sharp economic slowdown in China, subsequent decline in commodity prices and realignment in US monetary policy affected the emerging markets. Dividend payouts declined 8.3% to US$106.8 billion. However, underlying growth remained strong at 12.7%. 

China paid out the most dividends in the region, but payouts declined for the first time, falling 1.5% to US$27.9 billion. The report notes that “China’s large banks make up three-quarters of all Chinese dividends, yet despite the harsh trading conditions facing the banking industry, their dividends only dipped 1% year on year.” 

The high payouts were attributed to government influence. Despite that, some banks have surrendered to market forces and cut their dividends, such as China Minsheng Bank.

Across industries, financial companies paid almost a quarter of global dividends — US$12.5 billion. The industry’s 5.2% year-on-year growth was attributed to financial companies in Switzerland and the US. 

The report forecasts that headline growth should see improvement in 2016 as currency effects dissipate. But a lower global underlying growth rate is expected as the full impact of lower commodity prices and economic growth will be felt in the emerging markets. 

“Overall, we are positive on the prospects for dividend growth in the year ahead, though sectors sensitive to falling commodity prices are likely to cut payouts to shareholders. Stock picking is vital in these market conditions so that the income investor can avoid those stocks likely to produce poor shareholder returns. Equities remain a vital source of income for investors as global interest rates remain low,” Crooke said in the press release.

According to the report, global dividend payouts are expected to exceed US$1.17 trillion in 2016 — a headline growth of 1.6% or 3.3% increase in underlying growth. This is US$10 billion less than its last forecast, due in part to big dividend cuts being announced in the mining sector.

The Henderson Global Dividend Index is the first index to study global dividend trends. It tracks the progress global firms are making in paying their investors an income on their capital, using 2009 as a base year and an index value of 100. Each year, Henderson analyses dividends paid by the 1,200 largest firms by market capitalisation (as at Dec 31 of the previous year).