Mark Dampier: Focus on high-yielding giants of FTSE 100 is paying dividends

The potential to receive an attractive and growing income is likely to become increasingly important in the coming years as investors take advantage of new rules which allow them more flexibility over how they draw their pension. I therefore expect companies capable of paying a high and rising dividend, and funds seeking to invest in such companies, to become increasingly popular.

The Merchants Trust plc is an investment trust which currently offers an attractive yield of 4.7 per cent and has an impressive record of growing income, with the dividend having been increased in each of the past 32 years. Simon Gergel of Allianz Global Investors has been at the helm since June 2006 and his focus is predominantly on larger, high-yielding companies in the FTSE 100.

He starts by looking for stocks with an above average yield, although this alone is never reason enough for buying a company's shares. An attractive valuation, strong financial position and a competitive advantage are other qualities he looks for. The wider economic environment and broad themes or trends are also considered in his analysis. These factors will often be the catalyst that causes a company's share price to rise.

Presently, rather like Neil Woodford, Mr Gergel believes that the strong UK economic recovery we are seeing is unsustainable as households are still in far too much debt. He therefore has exposure to global businesses with strong franchises and attractive yields, which he believes could perform well even in an environment of slow economic growth. Examples include GlaxoSmithKline and Royal Dutch Shell.

Mr Gergel also believes that inflation in the UK could be higher than anticipated. To provide some protection he has invested in companies which own "real assets", such as buildings and property. The supermarket group Sainsbury's, Greene King, the pub operator, and utility companies such as Pennon and National Grid are all held in the portfolio.

Among financial companies he is generally avoiding banks, with the exception of HSBC. He prefers asset management companies such as Standard Life, Man Group and Ashmore, which benefit as their assets under management increase, and companies which benefit from increasing transaction volumes such as IG Group and ICap.

Companies capable of benefiting from increasing consumer spending in emerging markets also feature in the portfolio. Among the businesses he expects to benefit from this theme are British American Tobacco, Mothercare and United Business Media, a marketing and events company which is seeing strong growth from its emerging market operations.

Mr Gergel claims not to buy companies purely because they are a large part of the index – if he does not like a company he will not own it. There is no exposure to AstraZeneca, Vodafone or Diageo, for example, and there is limited exposure to mining companies as they currently don't offer attractive enough value. Similarly, when he is positive on a company's prospects he invests with high conviction, and is prepared to hold big positions in individual companies. Royal Dutch Shell, for example, is a 9 per cent holding, and GlaxoSmithKline is 7.6 per cent.

Overall the trust has around 70 per cent invested in the FTSE 100, with the remainder invested at the larger end of the FTSE 250. A bias towards larger companies, less exposure to sectors typically associated with income investing, such as healthcare, consumer goods and telecoms, and no exposure to overseas-listed shares differentiates this trust from peers.

The trust takes advantage of its flexibility to borrow money to invest, and gearing currently stands at around 20 per cent. Along with the relatively concentrated portfolio of around 43 stocks this does increase risk and could mean that the trust is more volatile than the benchmark index.

After a difficult period during the financial crisis the trust has performed well recently and since Mr Gergel took over the share price has grown by 78 per cent with dividends reinvested compared with 58 per cent for the FTSE 100.

The trust could be considered by investors seeking a higher yield now from a portfolio of predominantly larger companies, though it should be noted that at the time of writing the trust trades on a premium to net asset value of approximately 1.1 per cent.

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.hl.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Telesales Executive - OTE £25,000

    £13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...

    Ashdown Group: Graduate Developer (Trainee) - City, London

    £25000 per annum + benefits: Ashdown Group: A large financial services company...

    Ashdown Group: Marketing Assistant - Financial Services Sector - London

    £20400 per annum: Ashdown Group: An established and highly reputable organisat...

    Day In a Page

    The Silk Roads that trace civilisation: Long before the West rose to power, Asian pathways were connecting peoples and places

    The Silk Roads that trace civilisation

    Long before the West rose to power, Asian pathways were connecting peoples and places
    House of Lords: Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled

    The honours that shame Britain

    Outcry as donors, fixers and MPs caught up in expenses scandal are ennobled
    When it comes to street harassment, we need to talk about race

    'When it comes to street harassment, we need to talk about race'

    Why are black men living the stereotypes and why are we letting them get away with it?
    International Tap Festival: Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic

    International Tap Festival comes to the UK

    Forget Fred Astaire and Ginger Rogers - this dancing is improvised, spontaneous and rhythmic
    War with Isis: Is Turkey's buffer zone in Syria a matter of self-defence – or just anti-Kurd?

    Turkey's buffer zone in Syria: self-defence – or just anti-Kurd?

    Ankara accused of exacerbating racial division by allowing Turkmen minority to cross the border
    Doris Lessing: Acclaimed novelist was kept under MI5 observation for 18 years, newly released papers show

    'A subversive brothel keeper and Communist'

    Acclaimed novelist Doris Lessing was kept under MI5 observation for 18 years, newly released papers show
    Big Blue Live: BBC's Springwatch offshoot swaps back gardens for California's Monterey Bay

    BBC heads to the Californian coast

    The Big Blue Live crew is preparing for the first of three episodes on Sunday night, filming from boats, planes and an aquarium studio
    Austin Bidwell: The Victorian fraudster who shook the Bank of England with the most daring forgery the world had known

    Victorian fraudster who shook the Bank of England

    Conman Austin Bidwell. was a heartless cad who carried out the most daring forgery the world had known
    Car hacking scandal: Security designed to stop thieves hot-wiring almost every modern motor has been cracked

    Car hacking scandal

    Security designed to stop thieves hot-wiring almost every modern motor has been cracked
    10 best placemats

    Take your seat: 10 best placemats

    Protect your table and dine in style with a bold new accessory
    Ashes 2015: Alastair Cook not the only one to be caught in The Oval mindwarp

    Cook not the only one to be caught in The Oval mindwarp

    Aussie skipper Michael Clarke was lured into believing that what we witnessed at Edgbaston and Trent Bridge would continue in London, says Kevin Garside
    Can Rafael Benitez get the best out of Gareth Bale at Real Madrid?

    Can Benitez get the best out of Bale?

    Back at the club he watched as a boy, the pressure is on Benitez to find a winning blend from Real's multiple talents. As La Liga begins, Pete Jenson asks if it will be enough to stop Barcelona
    Athletics World Championships 2015: Beijing witnesses new stage in the Jessica Ennis-Hill and Katarina Johnson-Thompson heptathlon rivalry

    Beijing witnesses new stage in the Jess and Kat rivalry

    The last time the two British heptathletes competed, Ennis-Hill was on the way to Olympic gold and Johnson-Thompson was just a promising teenager. But a lot has happened in the following three years
    Jeremy Corbyn: Joining a shrewd operator desperate for power as he visits the North East

    Jeremy Corbyn interview: A shrewd operator desperate for power

    His radical anti-austerity agenda has caught the imagination of the left and politically disaffected and set a staid Labour leadership election alight
    Isis executes Palmyra antiquities chief: Defender of ancient city's past was killed for protecting its future

    Isis executes Palmyra antiquities chief

    Robert Fisk on the defender of the ancient city's past who was killed for protecting its future