Introduction
The Investment Association Global Equity Income sector posted positive net retail sales throughout 2015, peaking at £195m in July. It seems investors sought the comfort of dividend-paying stocks as fears about China’s slowing growth and the emerging markets in general hit markets.
The Henderson Global Dividend Index reported global dividends rose by 2.3 per cent to $297bn (£206bn) in the third quarter of 2015, following three consecutive negative quarters. Unsurprisingly, dividends from US firms rose significantly, with overall payouts climbing 23.4 per cent to $107.9bn.
Henderson also introduced its preliminary forecast for 2016, predicting dividends would increase by 2.4 per cent to $1.2trn. Head of global equity income Alex Crooke admits a slowdown in Chinese dividend payouts came sooner than expected.
He notes: “China is now the 10th-largest dividend payer in the world, so the slowdown matters. This is a salutary reminder for investors that rapid growth is impossible to sustain indefinitely, in any part of the world, and highlights the value of taking a globally diversified approach to income investing.”
Nick Clay, manager of the Newton Global Income fund, believes a global remit gives investors the “widest opportunity set”. He also stresses the need for an active approach when identifying dividend payers.
He explains: “The reason is a lot of firms that pay dividends do exactly the opposite. They do not sustain those dividends over time, they pay them through debt, they pay them through overreaching and they ultimately end up disappointing.
“So in effect we are fishing in a pool of statistically unattractive companies in order to seek out those firms that end up being very attractive.”
The fall in the price of oil has prompted many miners to cut their dividends and Mr Clay currently has no exposure to mining firms in his portfolio.
Investors may not want to rule out oil companies altogether though, as Richard Buxton, head of UK equities at Old Mutual Global Investors, points out. “While investors increasingly question the sustainability of dividend payments in some resources stocks, given the current level of the oil price there is value to be found in big oil firms, notably BP and Shell.
“You can ignore the protestations of management that the dividends will be held, assume payouts are halved and yet still find yields attractive relative to bonds or other equities.”
But other sectors may perhaps be more reliable dividend payers, with several managers including Mr Buxton backing the banking sector despite recent jitters. “We are seeing good value and dividend growth within the banking sector as the legacy issues of the past several years, notably PPI claims, dwindle and capital buffers are restored,” he says.
Invesco Perpetual Global Equity Income fund manager Nick Mustoe calls the banking sector a “classic opportunity”. He says: “The well-capitalised major banks, particularly in Europe, have been through a six-year rehabilitation. They’re typically trading at book value or less, and they all have very good dividend yields and the prospect of good dividend growth.”
THE PICKS
Fidelity Global Dividend
This £294m fund only launched in January 2012 but has generated solid returns, delivering 36.3 per cent across three years to February 4, compared with the IA Global Equity Income sector’s average return of 16.1 per cent, data from FE Analytics shows. The vehicle has also posted a positive return in the past year. Manager Daniel Roberts targets firms with a healthy yield. The factsheet states: “When considering potential investment opportunities, [Mr Roberts] places a large emphasis on the sustainability of the dividend and whether the share price provides an adequate margin of safety.”
Guinness Global Equity Income
Co-managers Ian Mortimer and Matthew Page seek attractively valued companies that they believe can grow their dividends steadily in the long term. They run a fairly concentrated portfolio of just 34 stocks, and among the top-10 holdings are Danone, Imperial Tobacco and Illinois Tool Works. This $151m (£105m) fund launched in December 2010 and has consistently outperformed its peer group. In the three years to February 4 the vehicle returned 26.5 per cent, but in the past year its performance entered negative territory, shedding 4.5 per cent compared with the sector’s 5.6 per cent loss.
EDITOR’S PICK
Artemis Global Income
Jacob de Tusch-Lec has been running this £2.9bn fund since launch in July 2010. In his search for rising income and capital growth, he invests in firms across sectors and geographies. The portfolio has a 39.1 per cent weighting to Europe ex UK, with North America accounting for 34 per cent. The largest sector weighting is to financials at 27 per cent, followed by industrials at 20.8 per cent. The top-10 holdings include General Electric, AbbVie and TLG Immobilien. The fund is the best-performing in the IA Global Equity Income sector over five years to February 4 2016, delivering 60 per cent against the sector’s average return of 34.7 per cent.
