Income investors turn to global equities

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Forecast double-digit earnings to drive dividend growth

Income-seeking investors will increasingly turn to global equities in 2011, with leading international asset manager Threadneedle forecasting that key international markets will experience double-digit aggregate earnings growth and increasing dividends in 2011.

“For the last two decades investors have traditionally turned to bond markets for income and to equity markets for growth. This is no longer the case. Low interest rates in the Western world and unappealing bond yields are leading investors to turn to equities as a source of income,” Threadneedle Head of Global Equities Jeremy Podger said.

“Corporate profits have recovered strongly over the past 18 months, magnified by operating leverage as a result of cost-cutting undertaken during the downturn.

“Threadneedle forecasts that the UK, European, US and Asian markets will all generate double-digit aggregate earnings growth in 2011. This, in turn, is likely to feed through to a recovery in dividends. Our estimates are for dividend growth of 11 per cent in the UK, 10 per cent in Asia ex Japan and 8 per cent in Europe ex UK in 2011.”

Mr Podger said the broadly-based dividend growth enabled equity income investors to take an increasingly global approach to their portfolios and this had a number of advantages over regional income portfolios.

“Firstly, broadening the investment universe allows investment in best-of-breed companies from across the globe. It also provides the opportunity to gain exposure to fast-growing markets in areas such as Asia, where a number of highly profitable companies are generating robust levels of dividend growth,” Mr Podger said.

Global investing also allows better access to dividend-paying companies in sectors that may not be well represented in regional indices.

“For example, the Australian market offers 119 companies with a market capitalisation in excess of US$500m and a dividend yield of more than 4 per cent, whereas the global market offers 1512 such opportunities,” Mr Podger said.

“This deeper pool of income stocks offers superior scope for outperformance and diversification.”

Threadneedle said the financial crisis affected companies’ ability to pay dividends, with a number forced to cut or suspend their dividends during the recession as profits came under downward pressure.

At the same time the financial sector, which has been an important source of income over the long term in most equity markets, saw many companies forced to stop paying dividends as a condition of government support packages.

“This situation was an exception to the long-term pattern whereby, unlike deposits and most bonds, the income generated by equity investments has the capacity to grow over time. The short-term factors that disturbed this long-term trend have now begun to reverse and we are entering a new dividend cycle,” Mr Podger said.

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