Baby boomers should seek out growth in dividends
Saturday 06 October 2012
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
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
10 tips for taking out a personal loan
Make money as a mystery shopper
Investment Insider: Poundland may not be cheap when it floats
How to start your own internet business
The whole truth about legal fees: Conveyancing can knock a big hole in home-buyers' finances. To get the best deal you must cross-examine solicitors about their charges, says Sue Fieldman
- 1 International Women's Day 2014: The shocking statistics that show why it is still so important
- 2 Australian man Rod Sommerville reacts to bite from deadly snake by reaching for cold beer
- 3 North Korea elections: Kim Jong-un wins 100% of the vote
- 4 David Cameron resorts to paying for Facebook fans because not enough people like him
- 5 Steve Irwin’s final words: Cameraman present at death opens up about deadly stingray attack for the first time
Britain's top vet sparks controversy with call for ban on slashing animals' throats in 'ritual' slaughters for halal and kosher meat products
If you're horrified by a flame-roasted dog, you should be shocked at a hog roast
Poor 'live like animals' says Boris's privately educated sister after going on 'poverty safari'
Exclusive: Impact of immigrants on British workers ‘negligible’
Vince Cable: Teachers 'know absolutely nothing' about the world of work
Ukraine crisis: Russia pledges to 'retaliate against sanctions' as Ukrainian president says Crimea vote will not be recognised
iJobs Money & Business
£32000 - £36000 per annum + generous benefits: Pro-Recruitment Group: * TAX * ...
£55000 - £70000 per annum + benefits: Pro-Recruitment Group: In-House Corporat...
£80000 - £100000 per annum + benefits: Pro-Recruitment Group: In-House Opportu...
£30000 - £35000 per annum + generous benefits: Pro-Recruitment Group: Mixed Ta...
Day In a Page
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony
A charming four-bedroom Oxfordshire cottage with oak floors and chunky-beamed ceilings, £465,000
A beautiful one-bed flat in a sought-after portered block, with access to Norland Square communal gardens
A one-bedroom flat within a Sixties school conversion with high-spec design and open-plan kitchen, close to Lambeth North Tube, £435,000
A 17th century four-bedroom house, with open fireplaces, cellar and pool, £600,000
A three-bedroom, coach house with luxury open-plan living space and contemporary breakfast bar
A newly refurbished one-bedroom flat in the heart of Mayfair, close to Grosvenor Square
A charming four-bedroom house overlooking Burleigh Square Park, close to Thorpe Bay
A three-bedroom farmhouse with a large inglenook fireplace and exposed beams
A boutique mews house, set around a central courtyard, with three bedrooms and a private roof terrace
A four-bedroom farm-conversion with three bathrooms and two reception rooms
A two-bedroom detached house with ensuite bathrooms and a sun-drenched decked terrace, £750,000
A modern and spacious two-bedroom, penthouse flat with two bathrooms in a prestigious development
A beautifully renovated five-bedroom terrace with three reception rooms and a courtyard garden, £700,000
A four-bedroom period house which has been extended to provide almost 2,500sq ft of living space, £675,000
A pretty three-bedroom Georgian home with a 22ft drawing room and a master suite with a balcony, £525,000
A substanstial family home with five bedrooms and landscaped gardens in the much sought-after Branksome Park area
A well-presented three-bedroom house with front and rear gardens, close to White City station, £475,000
A handsome five-bedroom house in a sought-after location close to the city centre
A five-bedroom country home with valley views, equestrian stables and 27 acres of land, £725,000
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A three-bedrrom flat with 2,733sq feet of living space, a beautiful private garden and 15 acres of communal grounds
A four-bedroom chalet bungalow with three bathrooms and a spacious garden, £525,000
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town