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
Sunday 03 April 2011
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; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
- 3 Make your voice heard: Sign The Independent's petition to welcome refugees
- 4 Refugee crisis: Aylan's life was full of fear - in death, he is part of 'humanity washed ashore'
- 5 German police forced to ask public to stop bringing donations for refugees arriving by train
Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
Britain to take more refugees as Cameron bows to pressure after more than 100,000 back our campaign
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
Theresa May says migrants should be banned from entering the UK unless they have jobs lined up
iJobs Money & Business
£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...
£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
£20000 - £25000 per annum + OTE 40k: SThree: SThree are a global FTSE 250 busi...
Day In a Page
With four bedrooms, this spacious maisonette in a mid-terrace period-style house in Holland Road is well-maintained and offers high ceilings and period features.
The terraces of this two-bedroom penthouse apartment offer panoramic views that stretch over fifty miles from the cliffs of Beachy Head.
In the heart of the coastal village of Mumbles and moments from the pier, this five-bedroom Victorian terrace is set over three floors and retains many original features.
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.