Date published: 23 May 2018
Dividends paid by companies across the world reached a record high in the first quarter of the year, prompting experts to recommend that investors expand their holdings in global income funds.
Though they have lower dividends relative to their value than UK funds, global companies are growing faster in terms of income than their British counterparts and their dividends appear more sustainable than the precarious payouts offered in the UK.
The collective dividend haul of global companies broke its previous peak in the first three months of 2018, according to asset manager Janus Henderson, rising by 10.2 per cent compared with the same period the previous year.
Global dividends rose collectively to $244.7bn in the first quarter, up from $222bn in the same quarter of 2017, driven by higher profits from global companies and a weaker US dollar.
But the average global equity income fund still offers a lower yield — the annual income delivered by a fund as a percentage of the fund’s value — than the average UK equity income fund.
The former yields 3.11 per cent today, ranging from the lowest yielding fund at 1.69 per cent to the highest yielding at just under 5 per cent, according to data from provider FE and fund supermarket Chelsea Financial Services.
That figure strips out so-called enhanced income funds, which use financial instruments to boost their payouts artificially.
The average UK equity income fund today yields 3.98 per cent, ranging from 2.75 per cent to 5.3 per cent. The highest yielding UK equity income open-ended fund is Insight Equity Income Booster, with a yield of 7.2 per cent.
The UK market has traditionally been popular with income investors due to its high dividend-paying stocks, such as oil groups Shell and BP. Healthcare giants AstraZeneca and Vodafone are also good sources of income, as well as Lloyds Bank.
Russ Mould, investment research director at AJ Bell, says: “The UK is one of the highest-yielding equity markets in the world, with a yield for 2018 of about 4 per cent on the FTSE 100 and a little less on the FTSE All-Share.”
But commentators say income investors should buy overseas income as well as UK income stocks, as UK dividends are growing more slowly and are more precarious than global payouts.
The level of dividend cover — the number of times a company can cover its dividend with revenue — is low in the UK, according to fund supermarket Chelsea Financial Services.
According to managing director Darius McDermott, dividend cover in the UK has fallen to a level of 1.42 times, below the “safety” threshold of two times covered. He says: “The top 10 yielders have even more questionable dividend cover levels, though some have high yields only because their share prices have fallen so dramatically.
“This means that while the headline level of income might be attractive, there are question marks over whether the companies can sustain their dividend payments.”
Dividend growth has been sluggish in the UK in recent months too. According to Link Asset Services’ UK Dividend Monitor, underlying dividend growth was “disappointing” in the first quarter of the year, with sluggish growth from big oil companies.
The UK’s market in income stocks is tightly concentrated, meaning disappointment from any of the largest names can result in a weak haul overall.
High yields can also be as much an expression of a rapidly falling share price as a sign of a stock paying high income. Many major UK income stocks have suffered share price falls since the UK’s Brexit vote, resulting in increases to their yield.
Investment trusts in the UK equity income sector are also trading on historically high discounts as a result. The average trust now trades on a discount of 4.4 per cent.
According to Mr McDermott, income investors should diversify and focus on equity regions where dividends are growing fast, instead of focusing only on regions where income is currently highest.
Mr McDermott says: “Many UK investors already hold UK equity income funds and trusts. So it is important to look at the level of income diversity in a portfolio. Arguably, many would benefit from adding some global equity income to their portfolios. While the overall yield may be slightly lower, they will benefit from more diversification.”
That includes areas such as emerging markets. According to Henderson, emerging market dividends grew by over a third between the first quarter of 2017 and 2018, driven by high special dividends from several high-profile companies.
The US and Canada also paid out record dividend hauls in the first quarter. The US in particular has been boosted by tax reform that boosted company profits and resulted in larger potential payouts to shareholders.
Mr McDermott says: “What is good to see is that companies all around the world are now recognising the importance of dividends and returning value to shareholders. This means there is now more choice and that dividend payments are not only growing in value, but also in consistency.”
Source: FT.com. This article has been corrected since publication where Mr McDermott referred to dividends, not discounts.
Link To FT.com: https://www.ft.com/content/dec6be0a-5d9f-11e8-ad91-e01af256df68
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