Go global for higher dividend yields
Global equity income funds are a relatively new, but potentially popular addition to the options available through unit trusts and open-ended investment companies.
Their emergence has been encouraged by investors' continuing thirst for a growing income - where equities have the strongest credentials - combined with the increasing difficulties of extracting it from the UK stockmarket.
Sarasin & Partners, which launched Sarasin International Equity fund in May 2006, puts the case well. "The fund looks outside the UK because the UK equity market is no longer the highest yielding global market.
"Back in 2006 it offered a world-leading yield. But dividends have subsequently seen greater growth in Asia (excluding Japan) and continental Europe than in the UK market.
"While the US, Japan and Canada offer the lowest yields on aggregate, there are still sector-specific yield opportunities," says Mark Whitehead, who manages the Sarasin International Equity fund.
Another reason for looking overseas, as Whitehead explains, is the diminishing choice of higher yielding UK companies.
Over 75% of the FTSE 100's dividends are expected to come from just 20 companies this year, with the top three alone accounting for a third of UK dividends. This makes it very hard for UK income funds to build sensibly diversified portfolios.
Sarasin's fund is limited to a maximum 10% exposure to the UK as well as to the emerging stockmarkets, so it's more internationally oriented than some of its competitors.
Its portfolio is equally divided between 50 companies and these are chosen according to a thematic approach.
Whitehead imposes the stipulation that his holdings must have a clearly stated commitment to paying a good dividend. Over its three-year life, however, it has outperformed the Global Growth sector average, and it has a very competitive yield.
THS (Taube Hodson Stonex, a London-based boutique, which invests globally on a long-term basis using in-house research) Growth & Value has a much lower yield, even if investors buy its A shares - which have lower charges in return for an upfront fee of 5%.
However, it has demonstrated its ability to grow its yield as well as its capital over a number of years.
The fund is top quartile within the Global Growth sector over five years, but suffered from having too much in banks in 2008, and too much in cash in 2009.
THS is currently upbeat, on the grounds that the co-ordinated actions of central banks and governments have restored confidence to financial markets, although it admits there are problems ahead, such as the level of government borrowing and inflationary pressures.
James Harries, who manages Newton Global High Income, is less confident.
With government fiscal and monetary stimulus measures expected to diminish, and a resumption of debt-fuelled growth unlikely to occur, he thinks the market as a whole is looking optimistically priced and fears that many companies will struggle to maintain their payouts in 2010. Share selection will therefore be critical.
"We believe the companies best placed to deal with this sort of environment are larger ones with strong balance sheets, reliable dividends, sustainable franchises and, preferably, some exposure to fast growing emerging markets," Harries says.
The Newton fund is concentrated in less than 70 holdings, and has strong buy and sell disciplines. Shares must yield at least 25% more than the FTSE World Index when they are bought, and must be sold when the yield is less than average.
Its income payouts, which are quarterly, have so far risen every year, and Harries expects another increase for the current year.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
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.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).