Mastering dividend investing amid uncertainties — Q&A with Fidelity International

In a time of economic uncertainty, where markets can be as unpredictable as the changing tides, finding reliable investment strategies has become paramount. Amidst this financial labyrinth, the quest for dividend-paying stocks has emerged as a beacon of stability and income for investors. This interview brings you face-to-face with Jochen Breuer from Fidelity International, a seasoned portfolio manager with 16 years of investment experience, to unravel the art of selecting quality dividend stocks.

As the world grapples with economic ups and downs in 2023, our discussion delves into Fidelity's approach to maintaining sustainable dividend payouts amidst this shifting landscape. Discover how they navigate the terrain, prioritising strong balance sheets and prudent cash generation to safeguard your investments, all while minimizing risk.

Moreover, Jochen Breuer offers unique insights into sector-specific strategies, particularly the financial sector's role in dividend-focused portfolios. Explore how Fidelity's confidence in this sector and its dividend payout strategy can potentially benefit your investment journey. We also delve into the dynamic world of real estate, discussing how interest rates impact investment decisions and how Fidelity assesses leverage concerns.

If you're an income-hungry investor seeking stability and growth in a turbulent financial world, this interview is your compass to navigate the dividend investment landscape. Join us as we unlock the secrets to building a robust dividend portfolio and discover how Fidelity International's expertise can help you thrive in uncertain times.

Watch the interview

Chapters

00:00 – Introduction

01:08 – How does Fidelity define and select good quality dividend stocks?

02:25 – With the economic uncertainty in much of H1 this year, how has Fidelity refined the way it selects dividend stocks to ensure a sustainable payout for investors?

03:26 – For the rest of 2023, what is Fidelity’s view of the macroeconomic environment and the pace of rate hikes by the Fed? How will this, in turn, impact its selection of dividend stocks?

04:40 – Turning to specific sectors, we see substantial exposure to financials for Fidelity’s dividend-focused strategies, both globally and in Asia. What drives this confidence in financials in terms of dividend payouts today?

06:00 – The real estate sector tends to dominate the Asian investing landscape. Given the current environment of higher interest rates from a year ago, how is Fidelity monitoring and assessing any concerns of excess leverage in the sector?

About the speaker

Jochen Breuer is a Portfolio Manager at Fidelity International based in Singapore. He has 16 years of investment experience and is currently responsible for managing Fidelity’s Asian Equity Income Funds as well as co-managing Fidelity’s Global Enhanced Equity Income Funds.

Jochen Breuer joined Fidelity’ London office in 2007 as an analyst. In the subsequent six years he covered a number of sectors, including Small-cap Industrials and European Media. In 2013 Jochen joined the Asia analyst team in Hong Kong and spent two and a half years covering the regional Energy, Chemicals and Shipping sectors. He is based in Singapore since 2021.

In 2015, Jochen worked more closely with the equity income team, based in London, and was asked to join our portfolio manager academy programme. In early 2016, Jochen started managing a pilot fund focusing on an equity income strategy for the Asia Pacific region. He took over management of Fidelity Asian Dividend Fund in October 2016 and Fidelity Funds - Asia Pacific Dividend Fund in November 2020. Since April 2021 he has been co-managing the Fidelity Funds - Sustainable Global Dividend Plus Fund as well as the Fidelity Global Enhanced Income Fund.

Jochen studied Finance & Asset Management at the International School of Management in Dortmund and holds a M.sc. Investment Management from Cass Business School, London.

Highlights from the interview

This section is extracted from the interview without any modifications to the original meaning. If you wish to understand the complete content, please watch the full video. Third-party speakers’ opinion in the webinar does not represent Endowus, Endowus accepts no responsibility or liability as to its completeness or accuracy.

Here are some key snippets from the conversation between Edwin Ho, Client Advisor Lead at Endowus HK, and Jochen Breuer, portfolio manager at Fidelity International.

Define & select quality dividends

Edwin:  How does Fidelity define and select good quality dividend stocks?

Jochen: First of all, quality. we're looking for simple business models with which companies can generate attractive and defensive through cycle returns, companies with strong balance sheets and good cash generation, and importantly,  management teams that have shown good capital allocation over time, which includes dividend payouts to investors as well.

The second thing we focus on is valuations. We are very valuation-conscious and want to make sure to limit the drawdown or downside risk for investors in the companies that we're investing in.

And finally, we are also obviously considering the income. But what we're trying to achieve is a total return for investors. So we are not reaching for the highest yield out there, but we want to invest in companies that can deliver a sustainable investment yield for investors.

Refine stock selection for sustained payouts

Edwin: With economic uncertainty in much of the first half of 2023, how does it affect Fidelity selecting dividend stocks and maintaining a sustainable dividend payout for investors?

Jochen: What we're looking to achieve for investors within our equity income range is to deliver a dividend-based total return where the dividend is an important part of that total return for investors over time. And we're trying to achieve lower risk characteristics than the markets or lower volatility as well as lower drawdowns in periods of market stress. I would say our approach to equity income investing in this period, which is certainly more uncertain than in the past, hasn't really changed. What we're looking for are companies with strong balance sheets, good cash generation, and companies that can grow their dividends over time for investors.

Outlook for the rest of 2023: impact of rate hikes

Edwin: For the rest of 2023, what is Fidelity's view on the macroeconomic environment, and what's your view on the rate hike path from the Fed? How does it in turn impact the dividend strategy for Fidelity?

Jochen: I think we currently live in a very uncertain environment. There are question marks around hard landing versus soft landing of the global economy, which obviously impacts the trajectory of rates. We also have significant geopolitical tensions currently in the world.

In my view, in this environment, it pays to be defensive and to focus on downside risk and we believe that our equity income solutions can provide that for investors. So really what we're focusing on is quality companies through focusing on valuations and strong balance sheets and making sure that those cash flows that the companies generate cover the dividends that are paid to investors.

Financials drive confidence in dividend payouts

Edwin: We see a significant exposure to financials across dividend-focused strategies in globally and Asia. How does this drive Fidelitiy’s confidence in the sector and dividend payout strategy?

Jochen: The first point I would make about our exposure across the strategies is that most of the companies that we are investing in are non-bank financials. So those would include exchanges and insurers, for example, P&C insurers. Those businesses are less cyclical than average banks, they have less balance sheet leverage and provide sustainable dividends.

But that does not mean we don't invest in banks at all. When it comes to Asia specifically, one has to recognize that a significant part of the investable universe is state-owned banks though, which we tend not to invest in. But we do find very attractive banking franchises in Asia, which especially in this current interest rate environment, generate very attractive returns and are willing to share some of those returns through buybacks and dividend payments with minority shareholders.

Monitoring real estate leverage concerns

Edwin: The real estate sector tends to dominate the Asian investing landscape. Given the current environment where interest rates are a lot higher than a year ago, how does Fidelity assess and monitor in case of any concerns about the excess use of leverage?

Jochen: I wouldn't say real estate dominates the investment landscape, but it certainly is an important topic, particularly if we talk about the Chinese private developers as well as commercial real estate in the rest of the world.

What I would say though is that real estate is a very local business with local supply and demand dynamics in each local market. And so, it's very kind of case-by-case basis. Where we do find attractive ideas is in some of the land plots where interest rates have led to lower valuations, but generally, these businesses tend to generate very sustainable and steady returns for investors.

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