None of us like uncertainty, least of all markets. So it is interesting to see how resilient the stock market has been over the last several months to date, despite all that has been thrown at it, from Brexit through to the surprise Trump win. In fact in the investment company sector alone, a quarter of companies hit record share price highs in January 2017.
Our own end-of-year fund manager poll found managers overwhelmingly positive on the prospects for markets and the US more generally, notwithstanding some background concerns. Again, amid clear uncertainty, the general consensus still appears to be ‘glass half full’, especially so given the anticipated boost to US infrastructure spending.
Of course one of the key stories behind the stock markets rise has been the continued demand for income in a low interest rate environment, with investors taking a more ‘risk on’ approach in the face of limited income options elsewhere.
While we all know that investors are hungry for yield, we don’t always think too carefully about just how important that income might be and what it means to shareholders – or indeed who those shareholders might be.
But Bruce Stout, manager of Murray International, is in no doubt: “When I talk to our shareholders and ask what they do with their dividend, they say it goes out of their bank account and pays their gas bill. That shows me that the real dividend is very important.”
Clearly this is something that investment company boards are increasingly realising, too, given the number of companies that have increased the regularity of their dividend payments in recent years. Last year, Association of Investment Companies (AIC) research revealed that 92 conventional investment companies now pay a quarterly dividend (43 per cent), compared to 82 by number in the previous year (32 per cent). In 2010, just 17 per cent of AIC member companies paid a quarterly dividend. There has also been a number of companies beginning to pay (usually some, not all) income out of capital, as an additional tool to give shareholders what they want: yield.
With inflation starting to creep up, I would wager that yield is going to become even more important. The AIC has used the performance of the UK Equity Income sector as an illustration of how investment companies have helped counter the effects of inflation – and how effective investment company dividends have proved in the past.
Data from the AIC, citing Morningstar, shows that £100,000 invested into the average UK Equity Income investment company on 31 December 1996 would have generated an initial average annual income of £3,700 by 31 December 1997, which would have grown to an average annual income of £8,516 by 31 December 2016. Annual dividend growth was 4.5 per cent, some 2 per cent ahead of inflation (annualised RPI inflation over the period is 2.78 per cent). Over 20 years investors would have received £119,872 of income from this portfolio. Meanwhile, in addition to the income generated, the capital value of the investment would have grown to £226,907 – an increase of 127 per cent – more than doubling.
£100,000 invested in average UK Equity Income sector at 31 December 1996
Capital return (£)
Income received (£)
Income yield (%)
Source: AIC, Morningstar
And it is by no means the UK Equity Income sector alone that has been income trailblazers. The investment company sector has a particularly strong dividend track record, with many investment companies having been able to increase their dividends each year for decades.