Broadening your dividend horizons

The UK has now languished for more than three years with record low interest rates, forcing income funds to become a must-have element in a majority of UK investors’ portfolios.

However, Talib Sheikh, portfolio manager on the JPMorgan Multi-Asset Income fund, warns that the search for that income – including income from equities – is now a “global rather than a domestic challenge”.

“With a prolonged low interest rate environment in the UK and around the world, income has become extremely precious. Having the flexibility to invest anywhere and allocate assets tactically has never been more essential,” he explains.

“Accessing income is not only a global challenge, but one that needs to pay heed to the age-old lessons of diversification. We’re conscious of the impact that adverse news flow can have on an individual stock and its dividends, and the greater effect that, in turn, can have on an entire portfolio.”

Andy Parsons, head of investment research at The Share Centre, says: “As an investor in the UK, equity income has traditionally been provided by investing in the financial services arena, oil, utilities, tobacco and telecoms companies. However, global equity income funds allow for sector and income diversification. For example, the US is a market leader in the information technology arena, as well as being innovative in the automobile market along with Germany and Japan, whereas Denmark is innovative in energy development via wind power.

“A global fund should provide investors access to the companies in the sectors and assets that a home-market bias cannot deliver directly.”

According to Mr Parsons, investors that have traditionally looked overseas for income have initially focused on Europe and, more recently, Asia. But when the regional allocation of global income funds is broken down, a key component is the US.

He adds: “The US is not historically known for its income opportunities. However, investors will be surprised to see that for many global equity income funds, this arena will generally account for around 30–45 per cent of a portfolio’s underlying holdings.

“The US increasingly offers investors income diversification, a higher concentration of income opportunities and domiciled companies that are recognised for having established dividend policies. The US also has a large number of global brand leaders, most of which tend to have overseas interest.”

While dividends are naturally associated with income portfolios, they can also be used as a defensive tool against volatile markets, according to Russ Koesterich, iShares’ global chief investment strategist.

He says: “Dividend stocks are generally less volatile than the broader market. For example, in mid-May, the S&P 500 was approximately 8 per cent off its May peak, while the Dow Jones Select Dividend index and the Morningstar Dividend Yield Focus index were only down 4.5 per cent and 2 per cent respectively. This is consistent with the historical pattern. Even in emerging markets – typically a more volatile sector of the market – dividend stocks tend to cushion the downside.”