High-yielding stocks appeal to investors, but companies offering strong dividend growth may be a better long-term bet.
Investors continued to seek income amid the current volatility, with IA Global Equity Income becoming one of the few sectors to report positive inflows over the past six months, attracting £1.8bn.
But it’s not just income investors who have been drawn to the sector this year, as dividends have offered a method of offsetting the damage caused by rising inflation, according to James Harrisfund manager Trojan Global Income and Securities Trust of Scotland.
He said that when the markets fall, “the most important question to ask at that time is how much income is my portfolio generating? If you can cover your expenses with this income, you don’t have to sell your funds at an inopportune time”.
However, Sam Witherowmanager of the JPM Global Equity Income and Global Dividend funds, said that many income managers tend to seek the highest yields rather than the companies with the most consistent growth in returns, even if the latter is more advantageous over the long term. term.
“While some of our peers will focus more on stocks that outperform the broader market, we invest across the spectrum of returns,” he said. “We think any company that pays a dividend is fair game as long as a lower return is matched by much higher growth.”
Here, Trustnet asks income managers which holdings they expect to generate the most dividend growth in the future.
Microsoft’s dividend payouts of 0.86% may not seem like the most attractive option in terms of face value, but Stuart Rhodesmanager of the M&G Global Dividend fund, said that “its performance does not tell the whole story”.
He pointed out that “the dividend has more than tripled since 2012, meaning the actual return on a forward-looking basis was significantly higher.”
The tech giant’s share price is up 283.1% in the past five years alone and it remains a strong overweight position in M&G Global Dividend at 5.4% of assets.
Despite its long-term success, Microsoft’s stock price has fallen 16.7% year-to-date.
And despite being a mega-cap company owned by thousands of fund managers around the world, Witherow said Microsoft still offers good value for money.
“We would still say it’s a very cheap stock and the growth track for this business is still very high,” he added.
Likewise, cloud penetration is still in its infancy and Microsoft is well positioned to benefit from increased adoption, so “even if the return is quite low, the absolute dividend is huge.”
The strong dividend growth shown by the company is a good source of long-term income, but investors may need to balance it with higher-yielding equity for more immediate income.
Witherow said: “Not all of our holdings can be like Microsoft because it has a dividend yield of around 1%, while our portfolio has a dividend yield of 3.2%.
“So for every Microsoft with fantastic dividend growth characteristics, we also need to find high-yielding stocks.”
London Stock Exchange
Richard Saldanhamanager of the Aviva Global Equity Income fund, anticipates strong dividend growth on the London Stock Exchange (LSE).
Dividends have grown by more than 15% per year over the past five years and Saldanha expects this trend to continue in the future, especially with the recent acquisition of Refinitiv.
LSE bought the financial data and infrastructure business for around $27 billion in 2021, and its integration is expected to be supported by the holding company’s “highly cash-generating business model”.
The company should also weather increased market volatility, Saldanha says – rising inflation and tighter monetary policy have presented new challenges for many companies, but LSE’s share price is up 21%. .8% since the start of the year.
“We believe this growth can continue even in a slowing macroeconomic environment, thanks in large part to LSE’s resilient business model,” Saldanha added.
“With nearly three-quarters of revenue coming from recurring sources such as data analytics, we expect a relatively high degree of cash flow and dividend visibility going forward.”
The American health and life insurance company Aflac is the choice of Matte Pagemanager of the Guinness Global Equity Income fund.
It has increased its dividends by 9.2% per year over the past decade and increased its payouts by 22.1% in 2022.
Page expects this 40-year trend of consecutive dividend growth to continue in the future, thanks in large part to the company’s strong customer base in Japan.
Although it is a US-based company, around 70% of its revenue comes from Japan, with 95% of its customers renewing their policies there.
Aflac’s Japanese customers typically stay with the company for 20 years, providing a stable, long-term source of income.
Page said, “This recurring revenue and cash flow has grown over time due to an aging population.
“Furthermore, the deregulation of the Japanese financial system has allowed Aflac to sell its policies through banks or the post office, where Japanese customers are accustomed to making financial transactions.”