Global investment manager says there’s no need to sacrifice growth for income
Income story: is growth and returns possible?
Regardless of whether improving economic data prompts the Reserve Bank of Australia (RBA) to keep official rates on hold tomorrow, interest rates will remain at historic lows. So should income-seeking investors consider moving out of dividend stocks and seek capital growth as global economies pick up?
“Worldwide economic indicators are definitely improving, and with the property market also showing signs of life, most analysts would be surprised to see the RBA cut rates next week,” says Stephen Thornber, Portfolio Manager, Global Equity Income, at Threadneedle Investments. “In fact, if global economies continue to improve, at some next year point rates may even be lifted.”
Nonetheless, Mr Thornber says that a dividend income-based strategy can offer investors both a high yield and the potential for capital growth.
“Investing in dividend stocks doesn’t have to mean that the potential for capital growth is compromised,” he says. “In fact, the last two decades have shown that investing in companies which pay high dividends actually results in superior total returns.”
Talking about the effects on income-based strategies of better global economic data, Mr Thornber said that by focusing on dividend paying companies that are growing, investors can participate fully in rising markets.
“Traditionally income strategies have been a defensive investment, but a new generation of funds have been successful in both protecting capital during market weakness, while keeping up with rising markets – as we have seen this year.”
Equity income investing has grown in popularity as retirees seek alternatives to bonds and term deposits, which are less attractive as inflation rises.
“Equity income provides a good hedge against inflation, which is particularly valuable in an environment of quantitative easing as we have seen in recent years,” he explained.
In a low-growth world companies are using dividends not only as a means of rewarding investors, but also to demonstrate financial strength and draw new investors.
“A robust balance sheet means that a business can sustain rising dividend payments, weather potential economic storms, and invest in profitable growth,” Mr Thornber said.
Mr Thorber continued by saying that the volatility risk of owning equities can, to some extent, be offset by being prepared to invest for the longer-term, allowing the benefits of a rising stream of income to drive value creation.
“The right equities can deliver both yield and growth with manageable levels of risk,” he said.
At Threadneedle, meeting companies and conducting fundamental research lies at the heart of the stock picking process. This bottom-up stock analysis is then combined with thematic insights and overlaid with macroeconomic factors gleaned from colleagues working across all investment classes.
Mr Thornber concluded by saying that he expects continued growth in the global equity income sector in the years ahead, as the dividend culture gains momentum in world markets, and an ageing population continues to focus on yield.
“With the right stocks, investors should absolutely be able to expect strong and consistent income as well as capital growth as markets improve,” he said.
The Threadneedle Global Equity Income Fund (Unhedged), an Australian registered investment management scheme which invests in the actively managed Threadneedle Global Equity Income Fund, is available in Australia via Certitude Global Investments.