Top sectors for dividend growth revealed
In spite of the current eurozone crisis, Europe has posted dividend growth of 20.3% in the past five years.
Current volatility is hiding the fact that European companies are in an "excellent" and "competitive" position globally, says Stephen Macklow-Smith, manager of JPMorgan's European investment trust.
"They [European companies] are currently trading at attractive valuations and with the Euro trading at highly competitive exchange rates these companies are benefiting," he says. "We expect to see news around European dividends remain positive."
Specialist sector Commodities and Natural Resources follows Europe, with five-year dividend growth of 15.1%. UK Smaller Companies is in the third spot with 11.5% dividend growth over five years, followed by 10.5% from Asia Pacific excluding Japan and 8.6% for Global Growth & Income.
Average dividend yields of these top dividend growth sectors are less outstanding. The European sector has averaged yields of 2.2%, with Global Growth & Income the most impressive, reporting yields of 4.4%.
Annabel Brodie-Smith, spokesperson for the AIC, says dividends are a "crucial component" of investing, particularly in a low-interest, inflationary environment:
"The investment company sector occupies a privileged position when it comes to growing dividends.
"Some 16 investment companies have consistently raised their dividends each year for over 20 years with several investment companies breaking the 40-year mark."
The structure of investment companies enables them to hold back up to 15% of their annual income in reserve, making it easier to still pay dividends in leaner years.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
The difference between two currencies; specifically how much one currency is worth relative to each other. For example, if £1 is worth $1.50, converting sterling to US dollars, the exchange rate is 1.5. Converting dollars to sterling at those levels, the exchange rate is 0.66, so $1 is worth 66p. There are a wide variety of factors that influence the exchange rate, such as a country’s interest rates, inflation, and the state of politics and the economy in that country.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.