Baby boomers should seek out growth in dividends

 

Lower interest rates are here to stay. It is likely the UK base
rate will remain at 0.5 per cent for at least another two to three
years. Ben Bernanke, chairman of the US Federal Reserve, has
actually stated he won't raise interest rate rises until at least
2015.

This presents a dilemma for investors. Returns on cash deposits are below the rate of inflation so the purchasing power of savings is diminishing. Cash is an essential component of any portfolio. It can be accessed instantly and be used to pounce upon a bargain, whether it is consumer goods or an investment opportunity following a fall in the stock market. However, it isn't a great long-term investment. Those who relied on cash since 1990 have seen interest rates fall from 15 per cent to 0.5 per cent; hardly a safe form of income.

Effectively, central banks and politicians are trying to force investors out of cash into financial assets to support markets. A fall in base rates makes the yield from shares look attractive if you take a long-term view.

This brings me to the M&G Global Dividend fund which is just over four years old. It is managed by Stuart Rhodes who has chosen to house the fund in the IMA Global sector, rather than the Global Equity Income sector. This is because he does not want to be tied to a specific yield target. This strikes me as eminently sensible. In many cases, the companies with the highest yields aren't the best place to be. Income fund managers need to consider the potential for growth in income. Concentrating purely on achieving the highest possible income with no thought to future growth normally ends in disaster. As fund managers chase ever higher yields and become tempted to use alternative techniques to boost dividends, it becomes more likely they will have to cut dividends to a more sustainable level in future.

Mr Rhodes looks at three types of company as he believes having a balance will help the fund outperform in different market conditions; keeping up to an extent in more racy bull markets, but maintaining a defensive element for when markets fall. Between 50 per cent and 60 per cent of the portfolio is generally invested in what he calls quality companies; those with a disciplined approach to dividends and reliable growth. Secondly, he invests between 20 per cent and 30 per cent in more economically sensitive companies which are backed by a strong portfolio of assets. This provides a degree of security as their share prices are generally more volatile. Finally, he looks for rapidly growing companies which could have exposure to faster-growing emerging markets or be developing an exciting new product line. Around 10 per cent to 20 per cent is generally invested here.

The fund's biggest weighting is in the US and Canada at 44 per cent followed by Europe at 26 per cent and the UK at 14 per cent. The rest is spread over south-east Asia, Australia and a small amount in Brazil. In the latter he has recently purchased Vale, the world's largest iron ore producer. The company's prospects are likely to vary with the outlook for global, economic growth and demand for iron ore, but he believes it is backed by strong assets. In the quality category are McDonald's and Sanofi, the French pharmaceutical company. Both have international exposure and products that could remain in demand regardless of economic conditions. Elsewhere, he believes Tod's, the Italian luxury shoe and leather goods brand, is capable of continued strong growth as it targets increased sales in international markets.

Elsewhere, Mr Rhodes is less positive on telecommunications and utilities companies. The main rationale is that he struggles to see how these types of companies will grow and he believes dividend pay-out ratios will ultimately drop. In addition, with utilities in particular, he is concerned about the amount of debt they have which he believes contributes to volatility in earnings.

Perhaps most important for investors and particularly baby boomers approaching retirement is growth in income. The fund has grown its dividend each year since launch and Mr Rhodes estimates growth in the region of 5 per cent for 2012/13.

It is growth in dividends and therefore income to the investors that I believe is vital for the future. With annuity rates seemingly forever falling, funds like this have the potential to grow your income for the next 20 years plus.

This fund is worth considering and could provide an element of diversification to a more UK-focused equity-income portfolio.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial advisor and stockbroker. For more details about the funds included in this column, visit   www.hl.co./independent

Suggested Topics
News
Pro-Russia rebels guard a train containing the bodies of victims of the Malaysia Airlines flight MH 17 crash in Torez, Ukraine
i100
Life and Style
Child's play: letting young people roam outdoors directly contradicts the current climate
lifeHow much independence should children have?
Arts and Entertainment
Tycoons' text: Warren Buffett and Bill Gates both cite John Brookes' 'Business Adventures' as their favourite book
booksFind out why America's richest men are reading John Brookes
Property
Sign here, please: Magna Carta Island
propertyYours for a cool £4m
PROMOTED VIDEO
Have you tried new the Independent Digital Edition apps?
News
people
Arts and Entertainment
Struggling actors who scrape a living working in repertory theatres should get paid a 'living wage', Sir Ian McKellen has claimed
theatre
News
Skye McCole Bartusiak's mother said she didn't use drink or drugs
peopleActress was known for role in Mel Gibson film The Patriot
News
i100
Arts and Entertainment
Damon Albarn is starting work on a new West End musical
artsStar's 'leftfield experimental opera' is turning mainstream
Life and Style
Paul and his father
artsPaul Carter wants to play his own father in the film of his memoirs
Sport
Ben Stokes trudges off after his latest batting failure for England as Ishant Sharma celebrates one of his seven wickets
cricket
Arts and Entertainment
Members of the public are invited to submit their 'sexcapades' to Russell T Davies' new series Tofu
tv
News
Sky's Colin Brazier rummages through an MH17 victim's belongings live on air
i100
Arts and Entertainment
Keira Knightley and Benedict Cumberbatch star in the Alan Turing biopic The Imitation Game
arts + ents'The Imitation Game' stars Benedict Cumberbatch and Keira Knightley
Extras
indybest
News
i100... and no one notices
Arts and Entertainment
Friends reunited: Julian Ovenden, Richard Cant and Matt Bardock in rehearsals for the Donmar revival of 'My Night
with Reg'
theatrePoignancy of Kevin Elyot's play being revived just after his death
Finacial products from our partners
Property search
All the signs have been pointing up for buy-to-let, but there are clouds on the horizon

Buy-to-let: is it a boom or a bubble fit to burst?

People borrowing to be landlords could face the same restrictions as homebuyers, with MPs voicing fears that property speculation may be overheating the market

Moment of truth for payday lenders: Watchdog plans to curb cost of short-term loans

The chief of the City watchdog, Martin Wheatley, spoke exclusively to The Independent's Simon Read about its attempts to control the worst excesses of unscrupulous high-cost credit companies

Consumers given power to choose a green deal

How would you like to be able to choose how your electricity is made and even where it come from? It may sound futuristic and fanciful but the independent supplier Co-operative Energy has made it a reality this week.

'Scrap the trap': calls for change grow as banks are told to play fair with loyal savers

City regulator says existing customers suffer worst rates

Motor insurers divided on proposals for whiplash ban

MPs want medical evidence for claims. Will this bring higher premiums?

British Gas repays £1m for mis-sold deals

British Gas was yesterday forced to pay back £1m to its customers after mis-selling them energy deals.

Bare necessities of life cost a pensioner £10,000

Pensioners now have to spend £10,387 a year on basic necessities such as food and fuel. new figures published today reveal.

Six months since its introduction, Obamacare has set market's pulse racing

As America's health reforms take effect, some firms look well placed to benefit, says Simon Read

Holidaymakers warned over hidden charges when opting to pay in sterling abroad

Fresh warnings emerged this week that overseas retailers and hotels aren't playing fair.

Employees will be able to request flexible hours in drive to make workplaces family friendly

From next week employees will be able to request changes to working hours. Rob Griffin weighs up the options

E2Energy's wind-turbine scheme offers green investors 7.5 per cent a year

If you're fed up with paltry returns on your savings and are interested in green energy, a new loan-based crowdfund launched this week could be a better home for your cash.

Why miss the chance of tax-free returns as Isas raise their game?

The tax-free limit of £15,000 is a big jump and rates for savers are starting to edge up, writes Simon Read
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Training Programme Manager (Learning and Development)-London

    £28000 - £32000 per annum + benefits: Ashdown Group: Training Programme Manage...

    Training/Learning and Development Coordinator -London

    £28000 - £32000 per annum: Ashdown Group: Training/Learning and Development Co...

    Business Analyst (Systems/ Incident Analyst)

    £40000 - £50000 Per Annum: Clearwater People Solutions Ltd: Business Analyst r...

    BA/PM - Client Data

    £500 - £550 per day: Orgtel: BA/PM - Client Data London (Greater)

    Day In a Page

    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn
    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Alistair Carmichael: 'The UK as a whole is greater than the sum of its parts'

    Meet the man who doesn't want to go down in history as the country's last Scottish Secretary
    Legoland Windsor's master model-makers reveal the tricks of their trade (including how to stop the kids wrecking your Eiffel Tower)

    Meet the people who play with Lego for a living

    They are the master builders: Lego's crack team of model-makers, who have just glued down the last of 650,000 bricks as they recreate Paris in Windsor. Susie Mesure goes behind the scenes
    The 20 best days out for the summer holidays: From Spitfires to summer ferry sailings

    20 best days out for the summer holidays

    From summer ferry sailings in Tyne and Wear and adventure days at Bear Grylls Survival Academy to Spitfires at the Imperial War Museum Duxford and bog-snorkelling at the World Alternative Games...
    Open-air theatres: If all the world is a stage, then everyone gets in on the act

    All the wood’s a stage

    Open-air productions are the cue for better box-office receipts, new audiences, more interesting artistic challenges – and a picnic
    Rand Paul is a Republican with an eye on the world

    Rupert Cornwell: A Republican with an eye on the world

    Rand Paul is laying out his presidential stall by taking on his party's disastrous record on foreign policy
    Self-preservation society: Pickles are moving from the side of your plate to become the star dish

    Self-preservation society

    Pickles are moving from the side of your plate to become the star dish
    Generation gap opens a career sinkhole

    Britons live ever longer, but still society persists in glorifying youth

    We are living longer but considered 'past it' younger, the reshuffle suggests. There may be trouble ahead, says DJ Taylor