Equity yields around the world, including those of blue-chip investments, are higher than average over the past 15 years – and investors are increasingly recognising this and taking advantage of the opportunity.
“One reason for this shift is that we are returning to the ‘old normal’ where investors are more interested in income than capital growth,” says Tom Stevenson, Investment Director at Fidelity Worldwide Investment.
“It has only been in the past 20 or 30 years that most investors have focused on capital growth.
“Income used to be the principal contributor to the total return from any investment, whether it was shares, bonds or property. It was the compounded growth of income, of reinvested income, which provided most of the total return over time.
“Another reason for this shift is that the baby boomers are retiring and prefer secure income, even if it is less than the returns of speculative growth.”
Mr Stevenson said “low interest rates and deposit accounts are becoming less attractive to investors. There is increasing demand for income – all around the world and from all types of investors whether it’s individual or institutional investors.
“Investors are favouring those companies with stable earnings, those that have a proven ability to produce good results regardless of the ups and downs of the economic cycle and macro economic environment. Investing in such companies not only gives investors the comfort of an attractive income stream in an otherwise low yield environment, the dividend payouts also provide some cushioning against possible price declines.
“This is one reason why dividend-paying stocks also tend to be good market performers; not just in bear market conditions when one would expect their defensive qualities to come to the fore but even in bull market conditions, as the chart shows up until the end of 2010.”
He notes “the power of reinvesting dividends grows exponentially over time and the compounding effect of dividend payments kicks in sooner than many investors might think. It takes an average holding period of only five to six years for income to overtake capital growth as the primary driver of a stock’s total return. Moreover, the compounding effect is boosted if the divided payments are relatively large by historical standards – as is the case today.
“Although inherent in any equity investment is some degree of risk, the types of companies that are offering high yields at the moment are at the safer end of the spectrum; they’re companies that everyone’s heard off.
“There are opportunities for those investors who seek income – income yields on blue-chip equities are higher now than the 15-year average, wherever you look across the world.”
20 July 2012
This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”). Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. This document is intended for use by advisers and wholesale investors. Retail investors should not rely on any information in this document without first seeking advice from their financial adviser. This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You also should consider the Product Disclosure Statements (“PDS”) for respective Fidelity products before making a decision whether to acquire or hold the product. The relevant PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Details about Fidelity Australia’s provision of financial services to retail clients are set out in our Financial Services Guide, a copy of which can be downloaded from our website at www.fidelity.com.au. © 2012 FIL Responsible Entity (Australia) Limited. Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.
