Investors have been pelted by bad news this year, but go global…and grab a share of the £347bn dividend profit
Investors have been pelted with bad news this year, with investments of all types and geographies in the doldrums. But there is one group that is less mired in gloom. Those who invest to earn an income on their nest eggs see some blue skies, especially those who know what to look for best.
According to the latest Janus Henderson Global Dividend Index, global dividend payments rose seven percent to £347 billion in the third quarter of this year. A whopping 90 percent of the companies around the world the investment house monitors increased their dividends — or kept them stable.
Investors who want their portfolio to generate income can choose to invest their money in a range of companies that regularly distribute a portion of their income in dividends to shareholders.
Across the globe: Global dividend payments rose seven per cent to £347 billion in the third quarter of this year
But an easier way to earn dividend income is to invest in a stock fund or mutual fund. These include anything from a handful to hundreds of stocks chosen for their potential to pay out an income.
This way you are not dependent on just a few companies and your risk is better spread.
Why a global approach to income is good
Global equity income funds are overlooked by many investors who choose to focus on the UK stock market.
This is not a terrible mistake; the UK market is good at paying dividends and the top 100 stocks currently offer an average annual income of 4.5 per cent.
But when looking at global income funds, the number of possible high-yield companies to choose from is increasing by leaps and bounds. There are three times more companies with a dividend yield of more than five percent among international companies than just UK companies, according to figures from fund manager Vanguard.
The global income sector saw total returns fall by an average of 0.6 percent year-to-date. This isn’t earth-shattering, but remember that most markets have taken a hit this year, so a modest decline compares favorably. Globally, funds as a whole have lost nine percent in value.
Importantly, some of the best-performing global equity funds have experienced near double-digit growth this year – almost enough to counteract the damaging effects of inflation.
Jason Hollands, managing director of investment platform Bestinvest, said: ‘The UK is the market leader when it comes to dividends, so income investors shouldn’t ignore the opportunities right on their doorstep.
“That said, it makes sense to embrace diversification when it comes to building and managing an investment portfolio, so investors looking to generate income should bet their nets wider.”
How to choose a foreign income fund
If you have a strong belief in which parts of the world are likely to provide the best dividend income, you can invest in income funds with a specific geographic focus, such as Europe, Asia or the US.
But if you choose a global equity income fund, you can invest in companies worldwide.
Keep in mind, however, that such funds vary wildly in their investment approach, so you’ll need to do some research to find out which one is right for you.
What is good income from a global fund?
When investing in global income funds, the goal should not be to find the funds with the highest returns, but rather to find those that provide consistent and sustainable income.
So look at the dividends paid out this year and past years. If possible, look at how the income funds you’re looking at have performed in different economic environments – from boom to recession. This doesn’t tell you how the fund will perform in the future, but it does give you an idea of its investment readiness.
By far the biggest contributors to earnings this year are oil and energy companies, which have benefited from rising energy prices. But some of the largest global income funds are far from it. This is because they believe that the dividends are not sustainable in the long run as the fate of such companies is often cyclical.
James Norton, head of financial planners at Vanguard UK & Europe, says investors should avoid yield traps – companies that offer high income not because they are healthy, but because their share price is low.
5 EQUITY INCOME FUNDS THAT TRAVEL THE WORLD TO PROFIT
1) GUINNESS WORLDWIDE EQUITY INCOME
This fund looks for quality companies that pay dividends that can grow over time. It currently generates an income of 2.6 percent. The fund invests in companies that make household goods, such as Pepsico and Johnson & Johnson, as well as industrial and healthcare companies, such as US pharmaceutical company AbbVie.
The portfolio consists of 35 stocks, each of which has the same weighting.
Interestingly, fund managers Ian Mortimer and Matthew Page don’t think about dividends until quite late in their stock selection process.
Page says: “We think the best way to identify companies with strong dividend growth is to start by looking at the cash flow they’ve generated over the past decade. We then narrow our list down to those companies with strong balance sheets and low debt. Only then will we look at dividends.’
2) MURRAY INTERNATIONAL
A publicly traded trust with an income of four percent per annum.
Dzmitry Lipski, head of fund research at investment platform Interactive Investor, says: “Unlike its peers, this trust has nearly half of its portfolio invested in Asia, Latin America and other emerging markets.”
The trust is run by Bruce Stout of Aberdeen Standard Investments. Holdings include companies such as Mexican airport operator Grupo Aeroportuario and Chilean chemical company SQM.
3) BAILLIE GIFFORD RESPONSIBLE FOR GLOBAL EQUITY INCOME
The managers exclude stocks in certain sectors, such as tobacco and alcohol, and instead focus on companies that adhere to strict sustainability criteria.
Top holdings include US consumer giant Procter & Gamble, Swiss companies Nestle and Roche and US technology company Microsoft. Bestinvest’s Jason Hollands says: ‘The fund is an attractive choice for those seeking increasing income from responsible equity investing.’
It currently provides an income of about two percent.
4) EVENLOADED GLOBAL INCOME
It looks for companies that will grow dividends over the long term. Unlike many rivals, nearly a fifth of its portfolio is in UK companies – such as Unilever and analytics firm RELX that generate their revenues globally. The fund provides an income of approximately two percent.
5) VANGUARD GLOBAL EQUITY INCOME
The portfolio includes 134 companies and yields 2.8 percent. An attractive feature is that its annual cost of 0.48 percent is half that of most rivals.
Top positions include healthcare company Pfizer, science and technology company Merck and insurer Axa.