The End of Globalization?

Trump’s tariffs are causing foreign countries to reexamine their supply chains to increase domestic production. This trend began during the COVID-19 pandemic, but the tariffs seem to be accelerating it. For example, Japan is increasing domestic production and sourcing from Southeast Asia to avoid tariffs and reduce reliance on Chinese manufacturing.⁴

Countries in the European Union are diversifying their supply chains by sourcing from within the bloc or neighboring countries to reduce dependence on imports from tariff-affected regions.⁵ India is boosting its “Make in India” initiative, encouraging local manufacturing and reducing imports by providing incentives to domestic producers.⁶ Canadian businesses are looking to source more materials domestically to avoid tariffs on imports from other regions.⁷

John Butler, a macro strategist at Wellington Management, thinks the tariffs could ultimately result in a rebalancing of capital flows away from the US.⁸ Butler says there are five main reasons to invest in the US—growth, return, liquidity, relative safety, and credibility—but that tariffs could change how international investors think about what the US has to offer.⁸

If investors conclude the US is likely to offer less growth, less return, and less safety going forward, Butler says we could see a structural reversal of capital flows to the detriment of the US, which would also translate into a lower dollar and a higher risk premium.^8,9 A lower dollar would be a significant tailwind for international equities.

Nanette Abuhoff Jacobson, global investment strategist for Hartford Funds, shares more potential implications: “We could also see relative outperformance of European equities, given European policymaker efforts to ramp up structural spending in areas such as defense, infrastructure, and digitization. This could also be a catalyst for European policymakers to accelerate their competitiveness and economic policy agenda, as outlined in the Draghi report.”^10,11

Allocating to International Equities

When it comes to international-equity allocations, there’s no one-size-fits-all allocation that’s right for every investor. FIGURE 9 shows how allocating different amounts of international equities into a portfolio can affect potential risk and returns within a portfolio. 

3. Incorporating Dividend-Paying Stocks

During periods of uncertainty, investors are typically more concerned with fundamentals such as earnings growth, consistent cash flows, and quality management teams than market narratives and promises of future growth. That’s why many investors turn to dividend-paying stocks during times of market stress—because dividends can be an excellent sign of a financially sound company.  

Many market forecasters expect the stock markets’ returns to be less generous over the next decade than they’ve been over the past decade. If so, dividends could grow in importance: In previous decades in which stock returns were in single digits, dividends played a much larger role in overall returns (FIGURE 10). 

A study by Ned Davis Research compared the dividend policies of stocks in the S&P 500 Index. They found that companies that either grew or initiated a dividend significantly outperformed companies that kept their dividends stable or non-dividend payers—and they did so with significantly less volatility (FIGURE 11). 

Dividend-Paying Companies Come From a Variety of Industries

When people think of what types of companies typically pay dividends, their minds may immediately go to sectors such as utilities and energy that have been a staple of dividend income for decades. But the types of companies that pay dividends have evolved over time. As companies mature and their growth rate stabilizes, many decide to return a portion of their capital to shareholders through dividends.

For example, Microsoft was one of the best growth names of the 1990s, and it began paying a dividend in 2003. Apple resumed dividend payments in 2012 after a long hiatus. Likewise, Nvidia first began paying a dividend in 2012. FIGURE 12 shows the dividend yield for each sector within the S&P 500 Index and the highest-yielding company within each sector.

There are many different ways to take advantage of dividends’ benefits. Some funds are style pure and invest only in companies that have above-average yields and below-average valuations. These funds are more likely to have higher allocations in the higher-yielding sectors above. Other funds may combine dividend-paying companies with out-of-favor growth companies and cyclical companies in pursuit of both dividends and growth. These funds could have significant allocations to growth sectors such as technology that generally don’t offer high yields but offer significant growth potential.

Dividend Payers Aren’t Just for Retirees

When thinking about which investors dividend-paying stocks may be appropriate for, retirees and near retirees are likely the first group that comes to mind. These investors are typically seeking a reliable income stream that can help fund their retirement. While bonds also offer a reliable income stream and are usually less volatile than stocks, they typically have limited growth potential. Given that most people will spend 30 or more years in retirement, it’s important to have some portion of a portfolio invested in equities that offer both growth and income.

But it would be a mistake to think that dividend-paying stocks are only for older investors. Over time, the compounding effect of dividends can result in significant capital appreciation. Going back to 1960, 85% of the cumulative total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding (FIGURE 13). Younger investors can potentially grow their investments exponentially by investing in financially strong, dividend-paying companies and allowing them to compound over long periods of time.

Takeaways

Bonds look attractively valued compared to stocks based on their yield relative to stocks’ earnings yield, and the average bond price is trading at a discount. Bond yields have historically been a good indicator of forward returns, and the current yield suggests potentially attractive returns going forward. Lower historical drawdowns for bonds relative to stocks highlight the important role fixed income can play in an investor’s portfolio.

After years of underperforming domestic equities, international equities may finally be poised to outperform. The US makes up just 14% of the world’s publicly traded companies, and most of the best-performing companies are outside the US. International equity benchmarks are less concentrated than the S&P 500 Index and offer higher allocations to cyclical sectors such as financials and industrials. If foreign investors choose to put their capital to work outside the US, the dollar could weaken, and international equities could benefit significantly. 

Dividends are a sign of financial strength and have been a major contributor to the total return of the S&P 500 Index, especially when returns were in the single digits or lower. Companies that grew or initiated a dividend have provided higher returns with less volatility than companies with stable or no dividends. Older investors may benefit from the steady income stream provided by dividends, while younger investors may benefit from the power of compounding over decades. 

While the specifics of what’s rattling markets are likely to change day to day, it seems volatility is here to stay. Investors should consider examining their portfolios to see if they’re truly diversified to help reduce concentration and volatility risk.  

4- and 5-Star Morningstar-Rated Fixed-Income Funds^*

4- and 5-Star Morningstar-Rated International Funds

4- and 5-Star Morningstar-Rated Dividend Funds