Mark Dampier: Focus on high-yielding giants of FTSE 100 is paying dividends
Saturday 31 May 2014
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
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