Equity Insights

Broadening out into dividends

The equity cycle of the past decade has been defined by US growth, particularly technology, leaving dividends somewhat overlooked.

From 2015 onwards, investors have been fixated on earnings growth and multiple expansion in a narrow set of leaders, even as income continued to make a substantial contribution to total returns in the background. That contribution is now becoming harder to ignore.

At the same time, the contribution of dividends to total return is often underappreciated. Looking at post-2000 returns, more than half of the cumulative gains in many equity markets have come from dividends, once reinvestment and withholding taxes are taken into account. The gap between price-only indices and net total return indices is striking, underlining how powerful the compound effect of reinvested income can be over long horizons.

Figure 1: MSCI World ex. US price index versus net return

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Past performance does not predict future returns.

Source: HSBC AM, Refinitiv, Datastream, MSCI. Data as of March 2026.

The relevance of dividends is not merely historical. Global dividends reached a record USD 2.1 trillion in 2025, up 7 per cent year-on-year, with Japan leading growth at 13 per cent, followed by Europe and emerging markets. Importantly, this was not a story driven by one or two sectors. The growth was broad-based across regions and industries, suggesting that the income opportunity is not scarce; rather, it has been obscured by the dominance of growth narratives.

Yield differentials reinforce the diversification theme. The US equity market currently yields around 1.5 per cent, whereas the UK yields just over 3 per cent, and parts of Latin America, including Brazil, offer yields above 4 per cent. Japan, historically a low-yield market, has also seen a notable improvement in payout behaviour, narrowing the gap with the US.

Figure 2: Regional dividend yield gap versus US across different periods (per cent)

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Past performance does not predict future returns.

Source: HSBC AM, Refinitiv, Datastream, MSCI. Data as of March 2026.

Higher sector yields outside the US and a volatile macro regime make income a natural extension of equity exposure.

Sector-level comparisons show a similar pattern. Europe offers superior yields in energy, financials and telecoms compared with the US, while emerging markets provide attractive yields across both cyclical and defensive segments. By contrast, US technology, communication services and financials generally deliver lower cash yields, reflecting their growth orientation and capital allocation choices.

Figure 3: Sector dividend yield across regions (per cent)

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Past performance does not predict future returns.

Source: HSBC AM, Refinitiv, Datastream, MSCI. Data as of March 2026.

That leaves investors with a more interesting backdrop than the one that prevailed through much of the last decade. Growth leadership remains important, but it is no longer the only framework through which equity exposure must be expressed. Record dividend levels, more attractive yields outside the US and a more volatile macro regime together make income investing look like a natural extension of the broadening out theme.

Dividends versus earnings: a relative anchor

Part of the appeal of dividends lies in their relative stability compared with earnings. Management teams are typically reluctant to cut dividends because doing so is often interpreted as a negative signal and can trigger outsized share price reactions. In practice, companies will usually reduce buybacks or other discretionary uses of cash before touching the dividend. That is one reason dividends often provide a steadier anchor for total return than earnings alone.

Over the past 20 years, dividends have generally exhibited far smaller peak-to-trough drawdowns than earnings – often only one-third to one-quarter of the magnitude seen in EPS at index level. The pattern is not universal, and there are clear exceptions, particularly in highly cyclical sectors or crisis periods – European banks during the global financial crisis are the obvious example – but the broader tendency remains clear that dividends are less exposed to the economic cycle than earnings.

Dividends typically fall far less than earnings, so sustainable payouts can anchor total returns through cycles.

Figure 4: Trailing World EPS and DPS fall from recent 5-year peak (per cent)

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Past performance does not predict future returns.

Source: HSBC AM, Refinitiv, Datastream, MSCI. Data as of March 2026.

Sector evidence helps explain why. Energy dividends were temporarily hit during the pandemic, but many integrated majors have since repaired balance sheets, lowered capex intensity and now appear better placed to sustain payouts than in earlier cycles. Real estate investment trusts, often bought primarily for income, have historically delivered relatively stable distributions, though they remain exposed to financing and property cycles. Consumer discretionary, by contrast, showed that apparent resilience can be deceptive and parts of the sector saw substantial dividend cuts during the pandemic, despite strong brands and historically solid margins.

This is where income investing diverges from simple yield-chasing. A high payout ratio or an elevated dividend yield is not, in itself, a sign of quality. What matters more is the visibility of cash flow, the strength of the balance sheet and the discipline with which capital is allocated. Companies with robust free cash flow and prudent reinvestment frameworks are better positioned not only to sustain dividends, but to grow them over time. That distinction is crucial, because the strongest income opportunities are often found not in the highest-yielding names, but in businesses where distributions are one component of a broader capital allocation discipline.

In other words, dividends matter not simply because they are paid, but because of what their durability often implies about the business behind them. That is also why dividend yield becomes more interesting when viewed not only stock by stock, but as a broader factor in portfolios.

Dividend yield as a factor

From a quantitative perspective, dividend yield has been a surprisingly resilient source of excess return and a useful diversifier within equity portfolios.

Using a simple long-short construction on MSCI AC World since 2005 – long the highest-yield quintile and short the lowest, equally weighted – the yield factor has delivered annualised alpha of just over 3%. While that is somewhat lower than the headline outperformance of factors such as momentum, quality or growth, what stands out is its consistency. Yield is the only major factor that has produced positive average returns across all key macro environments.

Dividend yield as a factor has delivered steady excess returns across cycles, distinct from traditional value exposures.

Figure 5: Annual medium-term EPS growth expectations (per cent)

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Source: HSBC Asset Management, Bloomberg. Data from Jan 2005 - Jan 2026 on MSCI ACWI universe. Style returns are long-short alpha factor constructions, equally weighted of top and bottom quintile of stocks in their category. OECD Global Composite Leading indicator used to define cycles - values<100 and decreasing =‘contraction’, value<100 and increasing='recovery', value>100 and increasing= ‘expansion', value>100 and decreasing='slowdown’. Inflation environments defined as – US CPI YoY <3% =‘low’, US CPI YoY >3% = ‘high’. Rate environments defined as – US 10Y yield <3% =‘low, US 10Y yield >3% = ‘high’.

Across the economic cycle, dividend yield has tended to perform best during recoveries, when growth expectations rebound and investors rerate companies whose earnings and cash flows had been overly discounted in the preceding downturn. In expansions, steady cash-generative businesses can still participate in the upside while offering an income cushion. In slowdowns, investors tend to place a higher premium on visible cash flows and established payout policies.

The weakest phase is usually outright contraction, when risk aversion spikes and markets prioritise liquidity and perceived balance sheet safety. Even then, yield has on average still generated slightly positive alpha, which is notable given that many traditional value exposures have historically suffered much deeper drawdowns. That is why yield should not be treated as another version of value; its income component can cushion returns and high yielding businesses often sit in more mature, less volatile industries.

The same logic appears in inflation and rate regimes. Dividend yield has historically performed best when inflation and rates are high, when markets become less willing to pay for distant cash flows and more focused on visible near-term income. In 2022, when inflation in the US peaked near 9%, the yield factor delivered excess returns above 13%, materially outperforming many other styles. High yield equities tend to behave more like short duration assets in such environments, because a larger share of their return comes from dividends in the near term rather than from cash flows far into the future.

Yield performs best in high inflation and rate regimes and offers low correlation to most major equity factors.

Its diversification properties also deserve attention. Dividend yield is largely uncorrelated with beta, momentum, size and growth, and only moderately correlated with valuation factors. That makes it useful not only as a source of return, but also as a way of smoothing broader factor risk. In an environment where leadership is widening and macro volatility is more frequent, that combination of defensiveness and diversification becomes more valuable.

Figure 6: Factor volatility and correlations

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Past performance does not predict future returns.

Source: HSBC AM, Bloomberg PORT MAC3. Data as of March 2026.

Regional perspectives on income investing

Europe has long had a more established dividend culture than the US, with many companies explicitly managing payouts as a core element of shareholder returns. Compared with the US, headline dividend yields are structurally higher across much of the region, reflecting both more mature corporate life cycles and a greater emphasis on cash distributions. That profile is reinforced by sector composition, with large weights in financials, energy, utilities and telecoms – sectors that typically offer higher cash yields than the growth-oriented technology and communication services sectors that dominate US indices.

But Europe’s income case is not limited to traditional defensives. The region also contains globally competitive consumer, industrial and healthcare businesses with strong free cash flow generation, allowing investors to capture not just yield but dividend growth over time.

Asia, meanwhile, is often still viewed primarily as a growth region, yet dividends have historically accounted for more than half of total equity returns in many Asian markets. That contribution remains under-recognised because investor attention is often drawn to capital appreciation and headline growth narratives. In practice, however, corporate balance sheets in Asia are generally strong, with aggregate cash levels exceeding those of many developed market peers and creating significant room for dividends and buybacks.

Governance reform is helping unlock that potential. Japan’s corporate governance and ‘value-up’ initiatives, Korea’s attempts to address valuation discounts, and encouragement for higher payouts among Chinese state-owned enterprises all point to a gradual but meaningful shift in capital return behaviour.

While the US still offers lower headline dividend yields – reflecting its heavier tilt towards growth sectors – the income opportunity set is broader than is often assumed. A growing cohort of companies, including in parts of technology, now combine structural growth with disciplined capital return frameworks. The global income opportunity set is therefore not a simple choice between yield and growth, it is increasingly about identifying where strong cash generation, disciplined capital allocation and dividend growth intersect. These can often be found in growth companies.

Income strategy as a complementary approach

Taken together, the current market backdrop combines elevated concentration in a narrow set of US growth and AI-linked leaders, record global dividends, attractive yield premia in non-US markets, and a macro regime characterised by higher rates, episodic shocks and greater dispersion across sectors and regions.

That combination lends itself naturally to a more balanced approach. Rather than treating income and growth as competing styles, the more effective framework is to see them as complementary. On one side sit companies that ‘print cash now’ i.e. high quality dividend payers and growers selected for sustainable yields, strong balance sheets, high ROIC and prudent capital allocation across sectors such as financials, energy, utilities, telecoms and selected technology. On the other sit businesses with compelling long term growth prospects – including AI infrastructure and application leaders – that also demonstrate improving income characteristics or credible paths to future distributions.

This approach offers combined exposures to innovation and broadening market leadership without becoming overly dependent on a single theme, geography or valuation regime. It also restores something that has been easy to overlook during the long dominance of growth, which is the contribution of dividends to total return, and the role that cashflow resilience can play in improving portfolio balance.

For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index.

Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.

For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. The views expressed above were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and not guaranteed in any way. HSBC Asset Management accepts no liability for any failure to meet such forecast, projection or target.