Mark Dampier: Don't underestimate the importance of income

The Analyst

Unquestionably the most popular asset class with investors recently has been bonds. It has been this way for some time, particularly in the United States. Often I think popularity is a warning sign. The more people who buy into an area the more fashionable it becomes and this can lead to overpricing. Yet with many expecting interest rates to remain low, on this occasion I think the popularity could be warranted, at least for the time being. Government bonds have been in a bull market since 1990 when UK interest rates were 15 per cent, and this long-term trend could have a little further to run. However, the longer it does the more risk there is, and even now a contrarian investor would probably look to other asset classes for returns, notably equities.

True, equities have generally failed to perform over the last decade – perhaps largely because they were overvalued 10 years ago. I feel this is far from the case today, and one area I remain a particular fan of is UK equity income. These funds have been through a challenging period over the last couple of years given the nature of the recession we have had, though looking at Newton Higher Income over 15 years I note that the annualised return has been 9.4 per cent against a sector average of 6.9 per cent and the FTSE All Share index of 6.4 per cent.

So despite a difficult time, Newton Higher Income has given a pretty good total return. In fact, this is often true of high yield equities generally against their lower yielding counterparts. Total returns for high yield are some 10.8 per cent per year against 7.7 per cent for the low yield index and 9.2 per cent for the market. And that is for a genuinely long period – over 100 years! However, for some reason investors tend to underestimate the importance of dividends and prefer to focus on the latest growth story. That doesn't mean high yield stocks don't have their difficulties, though. Like most equity income funds Newton Higher Income has suffered from BP's dividend cut this year.

What manager Tineke Frikkee didn't expect was the previously declared dividend to be cancelled too, meaning three dividend misses in all. As a consequence the benchmark yield on the FTSE dropped to 3.2 per cent, which actually enabled her to add new names to the portfolio. Newton look at the benchmark yield on the index and only invest in shares trading at a premium to it. So, with the index yield dropping she was able to buy Tesco, HSBC and Next, each of which Newton's analysts rate highly. This fund adopts a classic equity income technique; buying shares on a high yield and then selling them once they become more fashionable and the yield drops below that of the benchmark.

Effectively there is an enforced discipline in buying low and selling high. The loss of dividend from BP has meant a cut in payouts from many equity income funds. However, Tineke has more than made up for it elsewhere with income from other stocks. In fact, she anticipates increasing the fund's income by a small margin this year. She has also kept her BP position, which I think is sensible, and she expects the dividend to be reinstated next year. With a yield of 7.3 per cent the fund is providing a tremendous return in the form of income, considerably ahead of government bonds and comparable to many corporate bond funds.

However, unlike a bond fund, this income stream should rise over the years as dividends increase. I see no reason why high yielding shares shouldn't provide capital growth too, as more investors become attracted to the regular income on offer and push up prices. While Tineke herself is not wildly bullish about economic conditions, she believes the companies in her portfolio should remain resilient. Top line growth may be hard to come by, but she expects to see more merger and acquisition activity, and I suspect this will keep the market moving forwards. So don't give up on equities, particularly the high yield part of market. Whether you want the dividend income or not, it's part of your overall return, a part becoming ever more valuable in the current low interest rate environment.

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

PROMOTED VIDEO
Arts and Entertainment
AKB48 perform during one of their daily concerts at Tokyo’s Akihabara theatre
musicJapan's AKB48 are one of the world’s most-successful pop acts
News
Ian Thorpe has thanked his supporters after the athlete said in an interview that he is gay
people
News
The headstone of jazz great Miles Davis at Woodlawn Cemetery in New York
news
Arts and Entertainment
Brendan O'Carroll has brought out his female alter-ego Agnes Brown for Mrs Brown's Boys D'Movie
filmComedy holds its place at top of the UK box office
News
newsBear sweltering in zoo that reaches temperatures of 40 degrees
Arts and Entertainment
Professor Kathy Willis will showcase plants from the Royal Botanic Gardens at Kew
radioPlants: From Roots to Riches has been two years in the making
Arts and Entertainment
TV The follow-up documentary that has got locals worried
Arts and Entertainment
Eminem's daughter Hailie has graduated from high school
music
Arts and Entertainment
Original Netflix series such as Orange Is The New Black are to benefit from a 'substantial' increase in investment
TVHoax announcement had caused outrage
Life and Style
Swimsuit, £245, by Agent Provocateur
fashion

Diving in at the deep end is no excuse for shirking the style stakes

News
One Direction star Harry Styles who says he has no plans to follow his pal Cara Delevingne down the catwalk.
peopleManagement confirms rumours singer is going it alone are false
Finacial products from our partners
Property search
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

    Information Security Manager (ISO 27001, Accreditation, ITIL)

    £70000 per annum: Harrington Starr: Information Security Manager (ISO 27001, A...

    Biztalk - outstanding opportunity

    £75000 - £85000 per annum + ex bens: Deerfoot IT Resources Limited: Biztalk Te...

    Trade Desk Specialist (FIX, Linux, Windows, Network Security)

    £60000 per annum: Harrington Starr: Trade Desk Specialist (FIX, Linux, Windows...

    Service Desk Analyst (Windows, Active Directory, ITIL, Reuter)

    £35000 per annum: Harrington Starr: Service Desk Analyst (Windows, Active Dire...

    Day In a Page

    Super Mario crushes the Messi dream as Germany win the 2014 World Cup in Brazil

    Super Mario crushes the Messi dream

    Germany win the 2014 World Cup in Brazil
    Saharan remains may be evidence of the first race war, 13,000 years ago

    The first race war, 13,000 years ago?

    Saharan remains may be evidence of oldest large-scale armed conflict
    Scientists find early warning system for Alzheimer’s

    Scientists find early warning system for Alzheimer’s

    Researchers hope eye tests can spot ‘biomarkers’ of the disease
    Sex, controversy and schoolgirl schtick

    Meet Japan's AKB48

    Pop, sex and schoolgirl schtick make for controversial success
    Iraq crisis: How Saudi Arabia helped Isis take over the north of the country

    How Saudi Arabia helped Isis take over northern Iraq

    A speech by an ex-MI6 boss hints at a plan going back over a decade. In some areas, being Shia is akin to being a Jew in Nazi Germany, says Patrick Cockburn
    The evolution of Andy Serkis: First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes

    The evolution of Andy Serkis

    First Gollum, then King Kong - now the actor is swinging through the trees in Dawn of the Planet of the Apes
    You thought 'Benefits Street' was controversial: Follow-up documentary 'Immigrant Street' has got locals worried

    You thought 'Benefits Street' was controversial...

    Follow-up documentary 'Immigrant Street' has got locals worried
    Refugee children from Central America let down by Washington's high ideals

    Refugee children let down by Washington's high ideals

    Democrats and Republicans refuse to set aside their differences to cope with the influx of desperate Central Americas, says Rupert Cornwell
    Children's books are too white, says Laureate

    Children's books are too white, says Laureate

    Malorie Blackman appeals for a better ethnic mix of authors and characters and the illustrator Quentin Blake comes to the rescue
    Blackest is the new black: Scientists have developed a material so dark that you can't see it...

    Blackest is the new black

    Scientists have developed a material so dark that you can't see it...
    Matthew Barzun: America's diplomatic dude

    Matthew Barzun: America's diplomatic dude

    The US Ambassador to London holds 'jeans and beer' gigs at his official residence – it's all part of the job, he tells Chris Green
    Meet the Quantified Selfers: From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor

    Meet the 'Quantified Selfers'

    From heart rates to happiness, there is little this fast-growing, self-tracking community won't monitor
    Madani Younis: Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Five-star reviews are just the opening act for British theatre's first non-white artistic director

    Madani Younis wants the neighbourhood to follow his work as closely as his audiences do
    Mrs Brown and her boys: are they having a laugh?

    Mrs Brown and her boys: are they having a laugh?

    When it comes to national stereotyping, the Irish – among others – know it can pay to play up to outsiders' expectations, says DJ Taylor