Now, as people live longer, work for more companies and (most recently) have no obligation to buy an annuity, so the line between before and after retirement has become somewhat blurred. And, increasingly it is becoming clear that not only is it important to secure an income in retirement, but also to preserve and grow one’s capital.
To this end, stocks that pay a good and growing dividend and the funds that manage to pick them are becoming increasingly sought after.
The good news is that dividends appear to be on the up. According to the latest edition of the Henderson Global Investors Dividend Index report, global investors saw their dividends grow a headline 11.7% year on year in the second quarter to a new record of $426.8bn.
“Currency movements contributed 1.5 percentage points to the growth rate, meaning robust double-digit dividend growth on a constant currency basis. The underlying picture, which excludes special dividends, rose an equally encouraging 10.2%. Special dividends totalled $16.0bn, and accounted for $6.5bn of the $44.6bn increase,” Henderson said.
To put that in perspective, the group’s dividend index rose to 157.8, which means it said that dividends are 57.8% higher over the last 12 months than they were in 2009, its base year.
According to Andrew Herberts, head of private investment management (UK) at Thomas Miller Investments, with equity income, you have a stream of income that should grow at least in line with profits.
But he says, one of the key decisions facing investors is whether to maximise income now and sacrifice potential growth or accept a lower level of current income in the expectation that this will grow faster as companies mature.
“Which way you go will be a function of current and future need (i.e. are you anticipating taking the income or reinvesting it) and also underlying investment style. Accepting lower income now by investing in companies whose dividends you expect to rise, necessarily puts you more in a growth camp than simply a value camp,” he says, but points out that this may well mean you are taking on more risk.
Ben Gutteridge, head of fund research at Brewin Dolphin, told Portfolio Adviser that there is always a place for good quality, dividend paying stocks in a portfolio. But, says currently the group prefers those companies where dividends are growing or have the potential to grow, rather than the current high dividend payers, many of whom are or are heading toward being ex-growth.
Ways to play it
Asked what funds he would look at for dividend exposure at the moment, Gutteridge said he currently likes the M&G Global Dividend Fund and the Artemis Global Income Fund.
Herberts also likes the Artemis fund, saying that both it and the Saracen Global Income and Growth Fund offer “a truly diverse spread of income.
In the UK space, he says, he also like the Aberforth Smaller Companies Trust, which he says has a value tilt, but has a dividend stream that will increase because “its small cap focus means that there is lots of scope for such growth”.
Looking at individual stocks, Talib Sheikh, manager of the JP Morgan Global Multi-Asset Income Fund, says he has been actively reducing his allocation to global equities in recent months in favour of a dedicated European focus.
This he says, reflects the higher dividend yield he is achieving in the region, relative to the global space. Two stocks he currently likes for dividends are GDF Suez, a specialist energy firm currently on a 7.8% dividend yield, and EU bank Swedbank, is currently yielding 5.6%.
“We’re not as high conviction on risk assets as we were a few months ago, because of valuations and volatility, but we still prefer stocks over bonds as a source of income and returns,” he says.
Michael Clark, manager of the Fidelity Moneybuilder Dividend Fund says he is currently rather positive on the banking sector in the UK.
While acknowledging that UK investment banks have been hit by a combination of subdued market volatility, low interest rates and a strong currency, which has seen the sector downgraded by Moodys, Clark says there remain some UK banks that could prove the bears wrong.
“The sector is home to some high quality companies which generate high cash flow sufficient to fund both future growth and increase dividend payments,” he says.
Particular stocks on his radar include: HSBC, which he says it is a steady compounder, with a good dividend yield of 5% and Barclays, an unloved stock that Clark says should offer a good yield by 2015.
