Hunt for Income - March 2012

Published by Investment Adviser | Mar 26, 2012

Last week saw technology giant Apple announce its intention to pay a quarterly dividend of $2.65 (£1.67) per share from July 2012, further fuelling the demand for income within investment portfolios.

Hersh Cohen, co-manager of the Legg Mason US Equity Income fund, says: “The decision reinforces what we’re seeing in the market, that is, more pressure from shareholders on firms to introduce or increase their dividends. Apple has clearly been watching others in the sector whose share price has benefited from positive dividend announcements.

“Microsoft, where we have a 3.1 per cent holding in the fund, has seen its stock rise since it increased its dividend [yield] to 2.5 per cent, and Seagate, the number one manufacturer of hard drives and storage solutions worldwide and another of the fund’s holdings, has seen its stock more than double since it increased its dividend by 39 per cent.”

Mr Cohen expects this to be the start of a long-term programme of dividend increases for the firm and to act as a catalyst for more firms in the tech space to follow suit.

Paul Atkinson, head of North American equities at Aberdeen Asset Management, agrees: “[This is] part of a welcome trend of cash-rich companies being prepared to return cash to shareholders through dividends. Technology companies in particular have very strong, cash-rich balance sheets. We expect to see more US companies follow Apple and those that already pay dividends will also increase their levels of payouts.”

In spite of the risks to the economy and the market, UK investors are on track to receive nearly £9bn in dividend payments this year, according to Capita Registrars. In the past five years, even though the market has been roughly flat, and in spite of the financial crisis, UK equity holders have nevertheless reaped £38bn in dividend income. This figure goes some way to demonstrating the importance of dividends as a source of long-term return from shares.

Charles Cryer, chief executive of Capita Registrars, observes: “Investors sold down their holdings in the early autumn as the market rebounded from the summer crash, there was ongoing uncertainty around the eurozone and the economy faltered. In hindsight, that seems a bad decision. The rally has had a new burst this year and there are signs of improvement in the economy from a variety of corners, which suggests share prices may be well underpinned. That seems to have encouraged investors back into the market.

“There are still risks to the economy and to share prices, however. This may explain why the net buying has been the most tentative in two years. Oil prices are back near recent highs and few serious commentators think the eurozone crisis has been permanently solved.

“Crucially, investors should not be too distracted by the short-term ups and downs of the index. We forecast dividend growth of 10 per cent this year to £75bn, putting an additional £510m in shareholders’ pockets – a welcome boost to strained family finances.”

Jenny Lowe is features editor at Investment Adviser