Where next for dividends?
Investors have been hit hard by dividend cuts over the past 18 months but two managers have revealed their secrets as they search for the elusive income.
Paras Anand, head of European equities and manager of F&C's European Growth and Income fund, urges investors to look outside of the UK for dividends.
He accepts that investors have traditionally looked to the UK stock market for income, where dividends are an ingrained part of equity culture. And until 2007 the UK has given a better dividend yield than Europe (FTSE All Share dividend yield compared with FTSE All World Developed Europe ex UK dividend yield).
However, he reveals that last year Europe delivered higher dividends for investors and is continuing to do so this year.
"Many European companies are increasingly re-assessing the importance of shareholder remuneration, including progressive dividend policies. This extends to companies across all sectors."
For example, the telecoms sector in the UK only contains five shares yielding more than 3.5%, whereas the European sector contains 14. In the financials sector, the UK has 33 stocks yielding above 3.5% while Europe has 46.
"Six companies account for 49% of dividends in the UK," says Anand. "Of these, I believe only two will grow their dividends in the future by a meaningful amount - HSBC and Diageo. So investors should look at a wider market for income and buy shares in Europe."
He names Deutsche Post as a company that has a strong yield (5.5%) with good prospects to both grow and deliver income.
Meanwhile, UK orientated income-producing investment vehicles have had to change their strategies to ensure they still produce a healthy level of income during the recession.
The City of London investment trust has cut its holdings from 102 to 89 to focus on companies with attractive yields and growth.
"Since January 2008, 23% of companies in the FTSE 350 have cut their dividends," City of London manager Job Curtis points out.
He agrees with Anand that Europe could be a good place to find income, and says he may increase his exposure to the continent from 5% to 15% over the next year.
However, Curtis believes the worst of the dividend cuts are over. "Going forward, FTSE dividends will hold. They will only grow very slowly."
He is also more confident than Anand about dividend prospects in the UK.
Curtis predicts that the majority of his 10 largest holdings will grow their dividends next year.
He says BP and Shell will hold their dividends while British American Tobacco, HSBC, GlaxoSmithKline, Vodafone, Diageo, Scottish & Southern Energy and Tesco will increase theirs.
"British American Tobacco will increase theirs by high single digits, while Glaxo will grow theirs by around 5% or 6%," Curtis adds.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
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%.
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.
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).
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.