TOKYO -- The post-U.S. election rally may be losing steam, but companies that raise dividends year in and year out are starting to shine.
The Nikkei Stock Average slipped for a third day Tuesday, falling 152.89 points to 19,301.44.
Now, pension plans and other long-term investors are looking beyond the rally and buying dividend-boosting stocks, reported a trader at a major brokerage. Mitsubishi UFJ Lease & Finance and Sundrug, both known for their dividend-increase streaks, gained ground in Tuesday's trading.
The so-called Trump rally was fueled by resource companies, banks and others that benefit from higher interest rates and inflation. While these stocks moved big in reflation trade, dividend-hiking stocks -- which theoretically would become less attractive when interest rates rise -- are going strong.
On Wall Street, the Morningstar U.S. Dividend Growth Index, which has a component requirement of streaks of at least five years for dividend increases, advanced 6.2% since the election -- narrowly beating the 6% rise in the S&P 500. Likewise, the S&P/JPX Dividend Aristocrats index, which tracks Japanese companies that have lifted dividends for at least 10 years and others, stayed solid and slightly topped the benchmark Nikkei average.
Seeing a link between reflation and growing dividends is key to this approach. BlackRock, the world's largest asset manager, is a fan of dividend-hiking stocks. To be able to raise dividends year after year, companies need a strong earnings foundation, which requires product and service competitiveness. The ability to hike prices during inflation would give companies an edge over peers, the thinking goes.
The ability to raise prices for goods and services was also key during the Abenomics rally in Japan, as prices finally edged up in 2014 and 2015. Snack producer Meiji Holdings raised prices to lift profit and enabled itself to pay higher dividends for two years through last fiscal year. Used-car auction operator USS charged higher fees, and its stock price climbed to an all-time high in 2015 when taking its stock split into account. The company has lifted its dividends for 16 years.
The market rally that began in the second half of 2016 is driven by a broader theme of structural reform, said chief strategist Hisao Matsuura at Nomura Securities. This is the fourth year since momentum took hold for corporate governance reform in Japan, and companies are just beginning to work on enhancing their returns on equity. Raising dividends serves as an indicator of corporate change, Matsuura said. He bets that companies such as Toppan Printing and Seino Holdings may increase ROEs substantially based on their projected profit, payout ratios and other factors.
Japan's Government Pension Investment Fund is also helping to push businesses to revamp their structures. It puts an emphasis on communication with possible investment targets when evaluating companies to manage its pension assets. "If not put into practice, philosophy has no value," said Chairman Akiyoshi Oba of Tokio Marine Asset Management -- indicating that his company is happy to support the push for structural reform.