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Equity Income

Welcome to our equity income website. We believe that an equity income approach has great potential to generate real growth in both income and capital, and could add value to your portfolio.

Explore the rationale, history and different regional approaches towards equity income investing through the features on the tabs below.

Watch our fund managers' webcasts to find out about Newton's global and regional equity income investment strategies, and how they seek returns in a challenging global investment environment.

Interested? Learn more through our "Resources" section below, and for more information, please
contact us.

What are dividends and how are they paid?

According to the Oxford English Dictionary, a dividend is, "a sum of money paid regularly (typically quarterly) by a company to its shareholders out of its profits (or reserves)."

Historically, it has been shown that dividends have been integral in providing returns to investors (Global Investment Returns Yearbook). However, dividends fall considerably down the 'pecking order' in the distribution of corporate earnings, lying behind capital expenditure and other investments. As such, it is important to understand a firm's capital structure and financing decisions in order to ascertain whether a company can maintain its dividend policy over the long term.

Learn more

How do dividend attitudes vary around the world?

Click on the map below to find out more.

World Map
The Dividend Life CycleWithholding Taxes in the UK

Dividends history

This timeline charts the development of dividends as a feature of shares, and includes a number of significant financial market events through history to provide historical reference points.

1602
  • 1602
    The Dutch East India Company invents dividends
    The Dutch East India Company invented dividends as a method of sharing the profits of joint shipping ventures. At this time, dividends were the only form of returns and, in the absence of disclosure standards, the only way to signal a firm's health. However, in times of rapid growth, the importance of returns from dividends was often forgotten.
1630s
  • 1630s
    'Tulip mania' struck Holland.
    'Tulip mania' struck Holland and a new breed of under-supplied tulips commanded prices of up to 5,200 guilders at the peak in 1637. Weeks later, prices crashed spectacularly to one-hundredth of this amount.
1720s
  • 1720s
    The 'South Sea bubble'
    The 'South Sea bubble' saw stocks in the South Sea Company reach 1,000 owing to speculation that they could not fail in their trade with South America and Mexico. When management began to sell their shares on account of the realisation of dismal earnings, panic spread and prices dropped to zero by the latter half of 1720.
1840s
  • 1840s
    The 'railway bubble'
    The 'railway bubble' began in the mid 1840s, when the Bank of England cut interest rates, rendering government bonds less attractive and encouraging investment in the growing railway industry. The peak was in 1845, by which time the economy had improved and investors were able to purchase stocks with just a 10% deposit. Furthermore, speculation was fuelled by new media sources, particularly newspapers, and a more modern stock market. In late 1845, investors began to realise that railways were not as lucrative as they had hoped, and when the Bank of England raised interest rates, money began to flow out of the sector, prices levelled out, and investors lost fortunes virtually overnight.
1900
  • 1900
    Governments imposed taxes
    In the early 20th century, governments in the US and UK imposed taxes and regulation that began to shape attitudes to dividends which still exists today. The first anti-trust laws in the US, such as the Sherman Anti-Trust Act of 1890, the Clayton Anti-Trust Act of 1914 and the Federal Trade Commission Act of 1914, forced US firms to consolidate earnings and to disclose more detailed financial information relating to earnings, such as sales figures. In the UK, dividends remained the only reliable disclosure relating to earnings.
1918
  • 1918
    Dividends dropped quickly as earnings were re-invested
    Dividends increased throughout WW1, but in 1918 they dropped quickly as earnings were re-invested to promote growth. Post-WW1 growth rates in the US were much higher than in the UK, with the latter struggling from the effects of the conflict. In this low-growth environment, dividends were highly valued and yields remained above 4%.
1920s
  • 1925
    Disclosure of earnings figures for US companies
    Amid compulsory disclosure of earnings figures for US companies, Lawrence Smith, the US economist, carried out significant research on the effects of compound interest. In his book, Common Stocks as Long Term Investments, he argued that a firm which re-invests earnings will be able both to pay out more dividends, and to reach a higher share price in the future than firms which do not reinvest their earnings. He also concluded that, over the long run, stocks would outperform bonds.
  • 1929
    Companies Act added to the emphasis on dividends
    The 1929 UK Companies Act added to the emphasis on dividends. It gave shareholders the right to vote on dividend payments at annual meetings, which served as a constant reminder to managers of the importance of dividends.
1934
  • 1934
    New valuation measures became necessary
    In light of higher growth rates in the US, and amid Lawrence Smith's continuing research, new valuation measures became necessary. The trend among many investors was to estimate growth rates and then to capitalise earnings. Graham and Dodd subsequently developed the new 'price-to-earnings ratio' ("PE ratio") in their book, Security Analysis: Principles and Technique.
1940s
  • 1945
    All began to rise
    At the end of WW2, earnings, dividend yields and bond yields all began to rise as both the US and UK experienced post-war growth.
  • 1947
    UK Companies Act required companies to consolidate earnings
    The 1947 UK Companies Act required companies to consolidate earnings, as was already the case in the US.
1960s
  • 1965
    Pivotal year for the UK
    A pivotal year for the UK. Corporate and personal tax rates were separated, and capital gains tax was introduced. This allowed British investors to fully understand earnings of companies, to utilise PE ratios and to focus on growth as well as dividend yield. The market capitalisation of stocks listed on the London Stock Exchange had grown by 60% from 1957.
1970s
  • 1970s
    UK government intervened to cap dividend yields
    Up until the early 1970s, the UK government had intervened to cap dividend yields, in order to promote growth through reinvestment of capital. Ironically, this encouraged firms to invest in less-profitable investments, which had a negative impact on returns.
  • 1973
    UK joined the EU
    The UK joined the EU, in the hope of improving economic competition and efficiency.
  • 1979
    Margaret Thatcher was elected as Prime Minister
    Margaret Thatcher was elected as Prime Minister in the UK. Her reforms lowered taxes and government spending, and deregulated and privatised a number of industries to promote competition. The belief was that the market determination of allocation and prices of scarce resources was more effective than government intervention, and that competition would increase efficiency and drive down prices. With the deregulation of financial services, many new financial products were created that helped to fuel a rise in credit, which drove the economy. Similar policies were initiated in the US by Ronald Reagan.
1980s
  • 1980s
    'Great moderation' began
    The 'great moderation' began, as volatility in financial markets and economies decreased and earnings and dividends grew. Dividend yields, however, began to fall as share-price increases outstripped dividends rapidly.
1990s
  • 1990s
    'Savings and loan' crisis
    A recession affected countries linked to the US 'savings and loan' crisis, including the UK. Similar to the 2007 sub-prime-mortgage crises, this involved the savings and loan institutions selling their loans on to Wall Street, which then repackaged and sold them back as bonds. When the original savings and loan customers began to default, many of the savings and loan institutions were forced into insolvency. This caused panic, which led to a sharp recession, and caused aggregate dividend payouts to stagnate. Dividend yields rose quickly, before falling back to their decreasing trend at the start of the 'tech boom'.
  • 1993
    Internal Revenue Code
    The US Congress passed section 162(m) of the Internal Revenue Code, prohibiting firms from deducting manager compensation of above $1 million from taxes. At the same time, they exempted incentive-based forms of compensation, which included stock options. This encouraged managers to use buybacks rather than dividends, as this boosted share prices and made managers' options more valuable.
  • 1995
    Rise of the 'dotcom' companies
    The rise of the 'dotcom' internet companies caused many investors to overlook traditional valuation measures such as dividend yield and the PE ratio. 'Discounted cash flow' methods became popular as they provided a system of valuation for companies with negative earnings. While aggregate dividends did increase, dividend yields in the US and UK fell to all-time lows as share prices hit record levels.
2000
  • 2000
    Bursting of the 'dotcom bubble'
    Between 1999 and early 2000, the US Federal Reserve raised interest rates several times, and the economy began to slow. It is not known what exactly triggered the bursting of the 'dotcom bubble'.
2001
  • 2001
    The Enron crisis
    The Enron crisis rocked investors' confidence in stock markets and put an emphasis on corporate governance and earnings disclosure.
2003
  • 2003
    Jobs and Growth Reconciliation Act
    US President George W Bush signed the Jobs and Growth Reconciliation Act, which reduced the dividend tax rate and capital gains rate to 15% in the US.
  • 2003
    Microsoft announced its dividend
    Microsoft announced its first ever dividend (of 8 cents per share) after eliminating stock options from its employee compensation incentives.
  • 2003
    Yields in the UK dropped
    Government bond yields in the UK dropped below dividend yields for the first time since the 1950s, emphasising the value of high-yielding stocks.
2008
  • 2008
    'Credit crunch'
    Earnings and dividends rebounded quickly after the dotcom bubble, and eventually reached record levels in mid-2007 before the next collapse amid the 'credit crunch'.
2009
  • 2009
    Volatility and uncertainty took hold of financial markets
    The credit crunch struck as a result of a liquidity shortfall in the United States. Interest rates were slashed and dividend yields remained low in both the US and UK, as volatility and uncertainty took hold of financial markets.

Asian Equity Income

Jason Pidcock

Jason Pidcock provides an update on Asian Equity Income.

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Newton Emerging Income Strategy

Newton Emerging Income Strategy

Newton Emerging Income Strategy

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Global Equity Income

James Harries

James Harries provides an update on Global Equity Income.

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The case for Equity Income

Nick Clay

Nick Clay presents the case for Equity Income investing.

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