Not long ago, it could be argued so-called 'global' equity income funds were just a blend of the blue-chip UK and US stock markets, with companies listed in those two jurisdictions holding a disproportional weighting in sector funds.
Latterly, however, these funds have had the opportunity to move away from these highly concentrated income-producing areas. The global dividend index tracked by Janus Henderson Investors shows global dividends have soared over 80% since 2009, when the index began.
Since 2009, Europe and the UK are the two regions to have seen the slowest growth in dividends, with three regions – Japan, North America and Asia Pacific ex Japan – all doubling their payouts in that time.
As a result, fund managers looking to produce an income stream for their investors have a far wider pool in which to fish than they ever have before.
That’s borne out in the stats. We used the Morningstar X-Ray tool to look under the hood of the three open-ended funds and two investment trusts from the Global Equity Income sector that are rated by our fund analysts.
An overview shows that UK stocks, despite their dividend reputation, account for just 12% of holdings. Only British American Tobacco (BATS) and Royal Dutch Shell (RDSB) came out in the top 10.
A third of the holdings came from across the pond, though only one – Microsoft (MSFT) – made the top 10. More than a quarter are European firms, with a further 15% coming from Asia Pacific ex Japan and 5% from Japan.
We preview the five top stocks in the holdings of our five top funds, which include the Gold rated £659 million Veritas Global Equity Income fund and Bruce Stout’s Silver rated £1.5 billion Murray International Investment Trust (MYI).
A trio of Bronze rated offerings complete the line-up; Jacob de Tusch-Lec’s £4.3 billion Artemis Global Income, Daniel Roberts’ £890 million Fidelity Global Dividend and JPMorgan Global Growth & Income (JPGI).
Pfizer (PFE)
While the sector’s payouts haven’t grown as much as some might have expected, healthcare is still clearly an important sector for global dividends. US behemoth Pfizer, which four years ago tried in vain to buy the UK’s AstraZeneca (AZN), is clearly a key name.
The near-$250 billion drugmaker is owned by the Veritas, Fidelity and JPMorgan funds and yields around 3.25%. The dividend has grown by a third over the past five years, but was cut in the wake of the financial crisis in 2009.
The share price has advanced 22% over the past 12 months and is up 14% year-to-date. Despite that re-rating, Morningstar analyst Damien Conover has a four-star rating on the stock, having increased its fair value estimate to $46.
“We continue to believe Pfizer is undervalued,” Conover says. He likes Pfizer’s maturing pipeline, which will “strengthen future cash flows and reinforce the company’s wide moat”.
Taiwan Semiconductor Manufacturing (2330)
Taiwanese firm TSMC is a leading player in the burgeoning chipmaking industry, with its products used in smartphones, televisions sets and MP3 players.
It yields just over 3% and shares are up around 12% in 2018, despite shareholders, which include Murray International and Fidelity Global Dividend, having had a rocky ride thus far thanks to trade tensions between the US and China.
With a two-star rating and fair value estimate of 194 Taiwan dollars, Morningstar analyst Abhinav Davuluri reckons the stock is overvalued. Second-quarter results recently showed good top-line figures, but expected sales growth in US dollars came in at high single digits, previously 10%.
Airbus SE (AIR)
Toulouse-based commercial and military aircraft manufacturer Airbus accounts for 6% of the Veritas fund, and is owned by JPMorgan, too. The firm has a modest yield of 1.4%, but has doubled its payout since 2014.
The share price is up 26% in the year-to-date and almost 50% in the past 12 months, with operating profit having doubled year-over-year, recent results showed. The firm continues to reduce capital expenditure, which Morningstar analyst Chris Higgins expects to drive both profit and cash flow.
However, he thinks the stock is fairly valued, currently trading at his fair value estimate of €104.
Novartis (NOVN)
Another healthcare name, Swiss Novartis yields a healthy 3.5%, but has seen its share price decline over 2018 and is flat over a one-year period. It’s down 20%, meanwhile, since a 2015 peak at over 100 Swiss francs.
Novartis has plenty of cash on the balance sheet, which it uses to fund its dividend, which has edged up every year since it began paying one back in 1997, the latest increase being 1.8%. Conover expects this trend to continue at a slow rate over the next few years.
Conover thinks the stock is slightly undervalued, “with the investment community underappreciating the strength of its recently launched drugs and late-stage pipeline”. Still, a fair value estimate of 84 Swiss francs suggests limited upside from current levels (80 Swiss francs).
Microsoft
Microsoft can be a hidden gem for income-oriented funds. It consistently ups the payout, and its shareholder return has been increasingly supplemented by share buybacks in recent years.
While a 1.5% yield may seem modest, the shares continue to power ahead, up just shy of a third year-to-date and 50% over 12 months. Azure is a leader in cloud technology and is expected to be the firm’s largest business over the next decade. Elsewhere, demand for Office 365 and LinkedIn remains strong.
Morningstar analyst Andrew Lange reckons Microsoft’s long-term outlook is “rosy” and sees some upside to shares, with a fair value estimate of $122. However, he cautions: “For potential investors, we only see a modest margin of safety in the name.”
