Expert View - Equity income
by Alan Steel
Saturday 16 October 2010
What's an investor to do? We're told inflation is rising again. Or is it deflation? Experts can't agree whether interest rates will remain low or start climbing quickly. Other miseries convince us of a lost decade for stock markets, and now analysts are predicting "the end of the cult of equities."
If you've had an average portfolio or an index tracker over the past 10 years you'd be wondering when the cult began. Fortunately, I've always been cynical and curious. Last year I came across the Latin motto of the Royal Society, founded in London in 1660 - Nullius in Verba. Roughly translated it means. "don't just take their word for it - check for yourself."
If you have access to the internet, put in the search term "the Death of Equities 1979" and you will get a link to an article that featured in BusinessWeek in August that year when experts agreed equities were finished as an investment, on the back of the Dow Jones Index going backwards since 1966.
I pity investors who followed that advice. World stock markets stabilised at the end of the Seventies and took off in 1982 in one of the strongest and longest bull markets in history.
Two months earlier, unit trust group Perpetual launched an income fund, investing in high-quality UK companies with decent dividend records. That fund now goes by the name of Invesco Perpetual Income and has been managed most of the time by Neil Woodford. Mr Woodford is a firm believer in being contrarian and single-minded, buying quality dividend stocks at decent prices.
And it's a very successful formula. Since inception, the unit price has grown net of all charges, on a total return basis at 15pc a year, doubling investors' money roughly every five years.
In America, Prof Jeremy Siegel is also a fan of sticking with quality, dividend-paying companies.
His research was published five years ago comparing the returns of the top dividend-paying companies within the S&P 500 Index from its launch in 1957 to 2003.
Over the 46 years, the performance of the top 20 was astonishing. In second position was Coca-Cola, long a favourite of Warren Buffett, which only managed a total return of 16pc per year.
The outstanding winner was Philip Morris shares returning 19.75pc per annum total return, turning a $1,000 original investment to almost $4.7m. Investing in quality dividend-paying companies via a unit or an investment trust has long been a successful investment system.
But despite these long-haul successes, economists persist in judging equities by comparing what happens to main indices. But they are so seriously flawed they are as useless as a chocolate teapot.
British research shows, for example, over the past 80 years the average return of the top 10 capitalised companies in the UK Index underperforms the average by 3pc every year.
Is it too late to join in the dividend-paying success story?
Research from the US shows that cash held on corporate balance sheets in developed countries is at the highest level in 60 years. Three times higher than it was in 1982, before equities delivered superior returns.
I believe this is an outstanding opportunity to acquire high-quality income funds, sticking with them for years to benefit from the value so obvious to contrarians such as Mr Woodford. And history tells us that the next nine months or so is likely to hold a nice surprise for these funds.
One or two UK funds spring to mind and it would make sense to have exposure to international areas too.
Mr Woodford is still a man to follow either in his Income or Distribution funds and Newton Higher Income looks a good bet too within the UK.
Internationally, the investment picture could be even brighter so it would make sense to tuck away some Invesco Perpetual Global Equity Income or Newton Global Higher Income and M&G Global Dividend.
Article courtesy of The Telegraph
Saturday 16 October 2010