Dividend funds an alternative to fixed income
WORRIED investors have once again been gravitating towards fixed income funds to shield themselves from the gloomy US outlook and concerns about financial stability in the Eurozone. But flow data from EPFR Global also suggested that “enough money found its way into emerging markets equity funds to suggest that yield remains a real concern”.
Yield-seeking investors have struggled of late: most equities are still perceived as too risky yet the yields on the perceived safe havens of UK gilts and US Treasuries have been falling. So much so indeed that the yield on the FTSE 100 has exceeded that of 10-year gilts. Even adjusting for BP, the prospective yield on equities is currently around 3.6 per cent, well ahead of its 30-year average, says David MacEwen, chief investment officer for fixed income at American Century Investments.
Consequently, high dividend funds have become popular. Pictet Funds, the fund distribution arm of Swiss private bank Pictet & Cie, recently launched its High Dividend Selection fund.
The UCITS-III fund will invest in listed global stocks which have predictable and stable cash flows and which have a minimum dividend yield of 3 per cent. This generally means utilities, telecoms, energy infrastructure such as pipelines and transport. The fund commits to pay investors an annual dividend of 4 per cent, which can be received either monthly or annually or it can be reinvested. In the event that the fund’s holdings yield more than 4 per cent in a particular year, it will pay a special dividend.
The attractiveness of income-generating equities is supported by Bank of New York Mellon Asset Management’s subsidiary Newton. In a recent paper putting forward the case for equity income investing, Newton says: “A focus upon companies that pay a regular cash dividend leads investors to hold a portfolio that is comprised of companies that are reasonably valued, that generate cash flow in a sustainable manner, that are sensibly managed and financed and that allocate shareholders’ funds with a view to long-term returns on capital.”
Newton’s chief executive Helena Morrissey says: “By investing over the long term in income-generating equities, we believe investors could enjoy real growth in income together with long-term capital growth.”
And for fixed income-biased investors, investing in high dividend equities can give you both a better yield and a different type of risk, says Bruno Lippens, senior investment manager at Pictet. Diversification, income and capital growth; high dividend equities appear to have it all.