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

News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
PROMOTED VIDEO
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Sport
Colombia's James Rodriguez celebrates one of his goals during the FIFA World Cup 2014 round of 16 match between Colombia and Uruguay at the Estadio do Maracana in Rio de Janeiro, Brazil
sportColombian World Cup star completes £63m move to Spain
Arts and Entertainment
booksThe best children's books for this summer
Life and Style
News to me: family events were recorded in the personal columns
techFamily events used to be marked in the personal columns. But now Facebook has usurped that
News
news
News
i100
Travel
Fair trade: the idea of honesty boxes relies on people paying their way
travelIt seems fraught with financial risk, but the policy has its benefits
News
people
Sport
Antoine Griezmann has started two of France’s four games so far
sport
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
Finacial products from our partners
Property search
Latest stories from i100
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

    Programme Director - Conduct Risk - London

    £850 - £950 per day: Orgtel: Programme Director - Conduct Risk - Banking - £85...

    Business Analyst (Agile, SDLC, software)

    £45000 - £50000 Per Annum + excellent benefits: Clearwater People Solutions Lt...

    Finance Manager - Bank - Leeds - £300/day

    £250 - £300 per day + competitive: Orgtel: Finance Manager - Accountant - Bank...

    Compliance Officer - CF10, CF11, Compliance Oversight, AML, FX

    £100000 - £120000 per annum + BONUS + BENEFITS: Harrington Starr: A leading fi...

    Day In a Page

    Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

    Noel Fielding's 'Luxury Comedy'

    A land of the outright bizarre
    What are the worst 'Word Crimes'?

    What are the worst 'Word Crimes'?

    ‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
    Can Secret Cinema sell 80,000 'Back to the Future' tickets?

    The worst kept secret in cinema

    A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
    Facebook: The new hatched, matched and dispatched

    The new hatched, matched and dispatched

    Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
    Why do we have blood types?

    Are you my type?

    All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
    Honesty box hotels: You decide how much you pay

    Honesty box hotels

    Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
    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