Income seekers should leave the country
By Ian Cowie
Saturday 10 December 2011
Income-seeking investors battered by frozen Bank of England base rates and faltering returns from the FTSE 100 index of Britain's biggest shares should consider a world of opportunity overseas.
Until recently, most foreign shares yielded lower dividends than UK equities and so tended to be ignored by investors whose priority is income. Now that there are rising numbers of exceptions to that rule, some wealth managers argue it is time to set aside the 'Little Englander' approach to asset allocation and consider global equities for income.
For example, new analysis by Investec Wealth & Investment (IW&I) which has £12.7bn funds under management shows that only one UK company currently ranks in the top 50 high-yielding global blue chips. That's Aviva, Britain's biggest insurer, which yields 8pc net of basic rate tax…
Only four other UK firms appear in the top 100 shares for income. They are BAE Systems, the aerospace and defence giant, where dividends equal 6.5pc of the share price; AstraZeneca, the pharmaceuticals conglomerate yielding 5.7pc; and utilities groups National Grid, yielding 6.2pc, and Scottish & Southern Energy, yielding 5.9pc.
Mouth-watering though those yields may be compared with dismal returns from bank or building society deposits, it is important to understand that dividends and share prices may fall without warning. Unlike depositors, there is no guarantee that stock market investors will get their money back.
Overseas equities entail additional risks because foreign exchange rates might move against you and there may be lower standards of corporate governance or shareholder protection in some foreign jurisdictions.
However, a small but rising number of UK-authorised and regulated unit and investment trusts now offer exposure to overseas equities with all the usual advantages of diversification to diminish risk - the same principle as not putting all your eggs in one basket.
These funds also enable investors to share the cost of professional fund management, including the administrative hassle of trading on foreign stock markets. Depending on the individual investor's attitude to risk and reward, funds that might be considered include the JP Morgan Emerging Markets Income Investment Trust, M&G Global Dividend Fund, Newton Global Higher Income Fund and Schroder Oriental Income Investment Trust. Only the last two have a five-year track record, the minimum period for which stock market investments should be considered because of the risk of volatility or short-term setbacks.
Investors in the average UK Equity Income fund have made no progress over the last five years; suffering a marginal loss of 0.34pc, according to independent statisticians Financial Express. But investors in the average Global Emerging Markets fund have enjoyed total returns of more than 42pc.
The downside for income-seekers is that the latter sector offers an average yield of less than 0.9pc, while UK Equity Income pays more than 4.4pc net of basic rate tax. Fortunately, some funds have delivered income and capital gains; for example, Newton Global Higher Income yields 4.9pc and investors enjoyed total returns of more than 34pc over the last five years. Schroder Oriental Investment Trust, which I hold in my self-invested personal pension (SIPP), yields 4.1pc and delivered 85pc over the same period…
Alan Steel of independent financial advisers (IFAs) Alan Steel Asset Management agreed. He said: "When you consider that global economic output has doubled since the end of 2000 but the FTSE 100 is lower today than it was a decade ago, while emerging market funds delivered strong returns over that period, it makes sense to follow the leaders.
"Why wait any longer to benefit from rising income yields and capital growth which are more likely to be found overseas? We support M&G Global Dividend, partly because the manager will only consider shares that have maintained or increased dividends for at least 25 years.
"We also like Newton Global Higher Income and Invesco Perpetual Global Equity Income. Given the paranoia about eurozone debt and the lack of demand for quality equities recently, these funds are available now at discount sale price. Provided you can afford to invest for five or more years, this might be a good time to consider buying now to tuck them away."
Against all that, you should not invest money in the stock market which you cannot afford to lose. Similarly, it is unwise to invest in stock markets if you are going to lose sleep at night when share prices fall. However, higher yields obtainable now are one reason to consider some exposure to equities, as part of a balanced portfolio of different assets, such as bonds and deposits.
…So, while keeping an eye on risks, it makes sense to remember that dividends do not end at Dover and to consider an international approach to investing for income.
Quote courtesy of The Daily Telegraph
Saturday 10 December 2011