International travel might be off the cards at the moment, but when it comes to your investment portfolio it's worth booking a round-the-world ticket to take advantage of dividends across the globe. We asked fund managers which regions they are hunting for income.
UK
The UK market was undoubtedly hit hard in the Covid-19 pandemic, with a raft of companies cutting payouts, but it has not earned its reputation as a haven for dividends for no reason. Richard Marwood, manager of the Royal London UK Equity Income fund, points to Smiths Group (SMIN) and BAE Systems (BA) as two examples of firms that have managed to keep growing their dividends, with income-stalwarts National Grid (NG) and Rio Tinto (RIO) also in the portfolio.
He also likes pharma giant GlaxoSmithKline (GSK), whose share price has fallen over the past year amid concerns over litigation costs, Brexit and plans to split the business. “The dividend will be a bit lower as a result, but will still yield more than the market,” says Marwood.
A lower, sustainable dividend is, he says, more appealing than a big headline yield anyway: “If you want 10% yield you’re going to have to take an unacceptable level of risk to get it in a world where the risk-free rate is zero.” And from here he believes the UK dividend outlook is good, with more companies reinstating or growing their payouts and the worst of both Brexit and Covid-19 behind us. “The UK market is definitely open for business and there are some attractive yields out there,” he adds.
Europe
Ben Ritchie, manager of the ASI Europe ex UK Equity Income fund, thinks there is a growing culture of paying and increasing dividends at European companies. Historically, firms in the region have tended towards low, fixed shareholder payouts but “there has been a greater commitment and willingness to progress dividends”. Higher yielding stocks have typically been prone to cutting their payouts, he adds, so a balanced approach is key for those hunting for income on the continent.
“Europe gives investors a different area from which to get their income. Equity income has traditionally attracted UK investors but they tend to stick to their home market,” says Ritchie. He likes insurance and utilities stocks which are reasonably priced and have good growth prospects. In the portfolio are insurers Zurich (ZURN) and Tryg (TRYG), for example. Holdings in drinks companies Heineken and Pernod Ricard (RI) yield 1.09% and 1.58% respectively, but the stable earnings of such businesses mean payouts are reliable. Ritchie adds: “I don’t expect the dividend rebound in Europe will be as strong as the earnings rebound and 2021 may be a bit of a transition year.”
With a global mandate Martin Connaghan, manager of the Murray International (MYI) investment trust, can invest across the globe and finds plenty of opportunities in Europe. He holds Italian utilities stock Enel (ENEL), consumer brands giant Unilever (ULVR), and pharma firm Sanofi (SAN), which yields a healthy 3.72%.
US
The US market is one notoriously focused on growth – indeed, the average dividend yield in the S&P 500 is just 1.5% - and over recent years much of the region’s attention has been on the big tech names Amazon, Alphabet and Tesla. But that doesn’t mean there is no income to be had in the region. Fran Radano, manager of the North American Income Trust (NAIT), has 40 stocks in his portfolio and says just one cut its payout in 2020. He says: “These stocks have predictable earnings and trade at fair valuations and that feels like a good place to be right now.”
He finds the pharma sector attractive and particularly since vaccine rollouts started at the end of the last year, pointing to AbbVie (ABBV) and Bristol Myers Squib (BMY) as two names in the portfolio that have benefited from the “re-opening trade”. Elsewhere he likes Union Pacific Railroad (UNP) and was able to buy Procter & Gamble (PG) during last year’s sell-off.
Radano adds: “We want companies with a strong balance sheet and predictable cash flows – we don’t want management burning the furniture to pay the dividend.”
Emerging Markets
Fast-growing emerging markets are another area often disregarded by income investors, but the diverse nature of the countries classed as emerging economies – from China to Mexico, and Brazil to Russia – means there are plenty of opportunities.
Sanjiv Duggal, manager of the HSBC Asia Pacific ex Japan High Dividend Strategy likes companies in India, Indonesia, Korea and Taiwan. Asian life insurance companies are one area for income investors in the region, as the growing wealth of the populations means there is a growing demand for such products. Young demographics mean many consumers in the region are incredibly tech-savvy too, making companies that can benefit from the rollout of 5G and digitisation – two key themes for the fund - an appealing option.
Duggal says: “Technology hardware companies in Taiwan and Korea remain attractively valued and are key beneficiaries of faster technology adoption, which has been further boosted by behavioural shifts stemming from the Covid-19 pandemic.” Among the top fund’s top holdings are computer chip maker Taiwan Semiconductor Manufacturing (2330), electronics giant Samsung (SMSN), and PT Telkom Indonesia (TLK). The fund has delivered annualised returns of 14.07% over five years and while its yield is currently just 0.81% the nature of its investments means there is good income growth potential.
