Spread the risk with global equity income funds

In these uncertain times, it makes sense to invest in companies that pay dividends. Julian Knight reports

Just because the idea of investing in companies in order to scoop the dividends they pay is an old idea doesn't make it any less valid. "Studies show that over the long term – we're talking 30, 40 or 50 years, between half and two-thirds of the returns investors can expect to have from a share investment come from dividend payments," said Darius McDermott, the managing director of Chelsea Financial Services. "Funds that invest in firms with the object of achieving high dividends – called equity income funds – or solitary share investment in big blue chip firms plays a major part in our client portfolios and should probably in yours."

Equity income funds don't quite have the glamour of emerging market investment or the potential to make a killing from the relatively recent explosion in commodity and precious metal prices. They are generally steady-as-she-goes investments, but at a time when cash savings accounts pay no more than 3 per cent, steady as she goes is not to be sniffed at.

"A lot of share prices in these big dividend-paying companies are much unloved. People seem more interested in mining, for example, which traditionally doesn't pay much of a dividend," said Ben Yearsley, an investment manager at independent financial advisers Hargreaves Lansdown.

"Take shares in a blue chip company like GlaxoSmithKline. Five years ago it was trading at around £20 a share while now it's £12. However, Glaxo still pays a really good dividend seemingly year in year out. That hasn't gone down – it's just a question of investment fashion. If you can get a share at around half the price it was five years ago but it's paying 4 or 5 per cent income – or invest in a fund which holds such dividend-paying companies – then surely that's got to be a strong option for anyone choosing what to do with this year's individual savings account allowance."

And investors looking to take advantage of this year's ISA allowance have only until Tuesday. Up to £10,200 can be invested in a stocks and shares ISA this tax year. Alternatively, the £10,200 allowance can be split between shares and cash savings. "ISAs are one of the few tax freebies we can all benefit from, but don't invest purely for the sake of making use of the allowance. The investment has to be right for your financial position and attitude to risk," said Mr McDermott.

Yet Mr McDermott believes that equity income can be a good starting point for investors. "Most equity funds invest the bulk of their money in a handful of shares. If they are designed to go into the UK market – these mega blue chips include the likes of BP, Shell, Vodafone, HSBC, Glaxo and AstraZeneca – this is both a good and a bad thing. Big companies should be more robust which is good, but at the same time a lot of the funds in the equity income sector are similar."

One fund manager tends to dominate any discussion of equity income funds and that is Invesco Perpetual's Neil Woodford. Mr Woodford has in the past called the technology bubble and reduced his investment in banking in the run-up to the financial crisis. Such contrarian and ultimately successful investment plays have made his reputation and grown his fund into one of the biggest in the country. However, both Mr McDermott and Mr Yearsley say that there is much more to the sector than one giant fund or manager.

"Mr Woodford has had a tepid couple of years, but we are still sticking with him. It highlights there is more to the sector," Mr Yearsley said. In particular, Mr Yearsley likes the Artemis income fund run by Adrian Prosser. "The fund invests up to 20 per cent overseas so if the manager prefers, say, the Swiss pharmaceuticals firm Roche, he buys that rather than, say, AstraZeneca in the UK. I like the fund's flexibility."

It used to be the case that UK and US companies were the chief payers of dividends, but the practice is now widespread. "Investors should look more globally to diversify their risk and expand the possible investment opportunities," said Talib Sheikh, manager of JP Morgan's Multi Asset Income Fund.

"The BP difficulties of 2010 reinforced the point that many UK income funds are overly concentrated on a limited number of names. Investing on a global basis offers 10 times as many stocks with a dividend paying over 3 per cent compared to purely concentrating on the UK. We see attractive dividend opportunities in emerging markets and Europe. We are much more cautious on valuation in the US," Mr Sheikh added.

However, despite banging the drum for a global approach to finding dividend-paying firms, Mr Sheikh is not a pessimist as far as the UK stock market is concerned. "The outlook is positive over the next couple of years; the dividend yield on the FTSE 100 is currently just over 3 per cent and slightly above long-term averages. We see opportunities for companies to increase dividends given high levels of free cash flow generation. The financial sector is likely to increase dividend payments as capital levels are rebuilt and regulatory pressures ease," he said.

Investors wanting to steer clear or limit the number of mega blue chip stocks could find bargains among UK small and mid-cap companies, says Martin Brown, the manager of the Ignis UK Equity Income Fund. "Many companies that stopped paying or cut their dividends during the last few years are now returning to the dividend list. And not just in a token manner. There are nearly five times as many small and mid-cap stocks paying an average or above market dividend than there are large-cap (FTSE-100) stocks," he said.

Traditionally, so-called defensive stocks such as tobacco, utilities and oil firms have been strong dividend payers. Fund management group M&G highlights Centrica (owner of British Gas) as a good bet for long-term dividend returns. However, with uncertainty in many parts of the economy, Mr Brown says some sectors of the stock market are best avoided.

"The outlook for the UK retail sector remains tough and I expect to see muted dividend growth in this sector, with a number of stocks being forced to cut their dividends," he said. "If you hold three or four shares in firms that pay a high dividend, then it takes only a little bad news to hit your returns hard. But if you have a fund you can expect the manager to have spread the money between 80 or 90 individual company shares."

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

News
Young Winstone: His ‘tough-guy’ image is a misconception
people
Arts and Entertainment
Man of action: Christian Bale stars in Exodus: Gods and Kings
film
Sport
Adnan Januzaj and Gareth Bale
footballManchester United set to loan out Januzaj to make room for Bale - if a move for the Welshman firms up
Arts and Entertainment
British actor Idris Elba is also a DJ and rapper who played Ibiza last summer
filmIdris Elba responds to James Bond rumours on Twitter
PROMOTED VIDEO
News
Hackers revealed Oscar-winning actress Lawrence was paid less than her male co-stars in American Hustle
people
Arts and Entertainment
Ellie Levenson’s The Election book demystifies politics for children
bookNew children's book primes the next generation for politics
Sport
Wayne Rooney warms up ahead of the English Premier League football match between Tottenham Hotspur and Manchester United at White Hart Lane
football
News
Outspoken: Alexander Fury, John Rentoul, Ellen E Jones and Katy Guest
newsFrom the Scottish referendum to the Ice Bucket Challenge, our writers voice their opinions
Arts and Entertainment
Lena Headey as Cersei Lannister in Game of Thrones
film
News
i100
Sport
Yaya Sanogo, Mats Hummels, Troy Deeney and Adnan Januzaj
footballMost Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
News
Nigel Farage celebrates with a pint after early local election results in the Hoy and Helmet pub in South Benfleet in Essex
peopleHe has shaped British politics 'for good or ill'
Voices
Strictly Come Dancing was watched by 6.9m viewers
voicesIt has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
News
Danielle George is both science professor and presenter
people
News
i100
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

    Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

    Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

    Selby Jennings: Quantitative Research | Equity | New York

    Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

    Selby Jennings: SVP Model Validation

    Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    Day In a Page

    War with Isis: The West needs more than a White Knight

    The West needs more than a White Knight

    Despite billions spent on weapons, the US has not been able to counter Isis's gruesome tactics, says Patrick Cockburn
    Return to Helmand: Private Davey Graham recalls the day he was shot by the Taliban

    'The day I was shot by the Taliban'

    Private Davey Graham was shot five times during an ambush in 2007 - it was the first, controversial photograph to show the dangers our soldiers faced in Helmand province
    Revealed: the best and worst airlines for delays

    Revealed: the best and worst airlines for delays

    Many flyers are failing to claim compensation to which they are entitled, a new survey has found
    The stories that defined 2014: From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions

    The stories that defined 2014

    From the Scottish independence referendum to the Ice Bucket Challenge, our writers voice their opinions
    Stoke-on-Trent becomes first British city to be classified as 'disaster resilient' by the United Nations

    Disaster looming? Now you know where to head...

    Which British city has become the first to be awarded special 'resilience' status by the UN?
    Finally, a diet that works: Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced

    Finally, a diet that works

    Californian pastor's wildly popular Daniel Plan has seen his congregation greatly reduced
    Say it with... lyrics: The power of song was never greater, according to our internet searches

    Say it with... lyrics

    The power of song was never greater, according to our internet searches
    Professor Danielle George: On a mission to bring back the art of 'thinkering'

    The joys of 'thinkering'

    Professor Danielle George on why we have to nurture tomorrow's scientists today
    Monique Roffey: The author on father figures, the nation's narcissism and New Year reflections

    Monique Roffey interview

    The author on father figures, the nation's narcissism and New Year reflections
    Introducing my anti-heroes of 2014

    Introducing my anti-heroes of 2014

    Their outrageousness and originality makes the world a bit more interesting, says Ellen E Jones
    DJ Taylor: Good taste? It's all a matter of timing...

    Good taste? It's all a matter of timing...

    It has been hard to form generally accepted cultural standards since the middle of the 19th century – and the disintegration is only going to accelerate, says DJ Taylor
    Olivia Jacobs & Ben Caplan: 'Ben thought the play was called 'Christian Love'. It was 'Christie in Love' - about a necrophiliac serial killer'

    How we met

    Olivia Jacobs and Ben Caplan
    Bill Granger recipes: Our chef's breakfasts will revitalise you in time for the New Year

    Bill Granger's healthy breakfasts

    Our chef's healthy recipes are perfect if you've overindulged during the festive season
    Transfer guide: From Arsenal to West Ham - what does your club need in the January transfer window?

    Who does your club need in the transfer window?

    Most Premier League sides are after a striker, but here's a full run down of the ins and outs that could happen over the next month
    The Last Word: From aliens at FA to yak’s milk in the Tour, here’s to 2015

    Michael Calvin's Last Word

    From aliens at FA to yak’s milk in the Tour, here’s to 2015