Income strategies continue to perform in all market conditions
Craig Mowll
Equity income strategies may have performed well in the last few years, but as quantitative easing is wound back and growth accelerates, can yield stocks really continue to deliver?
Absolutely, says Stephen Thornber, Fund Manager, Global Equity Income at Threadneedle Investments, who explained why investing for income can add performance over time, regardless of wider macroeconomic or stock market conditions.
“We believe there are fundamental reasons why high dividend companies outperform over the long term. Dividends demonstrate a commitment to creating shareholder value, promote long-term decision making, and reduce the risk that management makes poor investments.”
“Successful income investing is about identifying businesses that are paying high and growing dividends while sustaining a robust financial position. In a rising interest rate environment the importance of focusing on dynamic growing companies cannot be understated,” Mr Thornber explained.
“There is a misconception that performance of dividend stocks is closely linked to interest rates. In fact the majority of dividend stocks are priced by the market on a ‘total expected return’ basis against other stocks with similar prospects.”
“The exception to this is stocks we call ‘bond proxies’, typically companies that offer little or no growth, but a reliable income stream”. Regulated utilities or REIT’s would be good examples. These stocks are interest rate sensitive, and challenged by rising rates.”
Given the strong performance of the past few years, there is concern that equities may now be overvalued, and that investors should exercise caution.
Mr Thornber said that in his view equities remain attractive given valuations are at or below long term averages, and earnings are set to accelerate as a global recovery takes hold.
“High-dividend paying companies are trading at a discount to the broader market in every major market” he explained. “We are taking particular care when selecting companies in the US, where valuations are higher, but having said that, we feel the strong prospects for the US economy support higher valuations,” he said.
Mr Thornber continued by saying that dividend investing remains a sound investment approach for a number of reasons.
“For a start, current dividend payout levels are set to rise because corporates are in good health. In stark contrast to governments, corporates have done a good job of repairing their balance sheets in recent years. Cash generation is good, and because there is still reluctance to commit to large-scale capital expenditure, companies are using their cash in shareholder-friendly ways, such as dividend increases, special dividends and share buybacks,” he said.
In conclusion, Mr Thornber said that a global approach to equity income investing provided investors with a wider opportunity set.
“By adopting a global approach, investors gain access to economies which may be growing more quickly than their domestic economy.
“When managing portfolios, we aim to tilt the portfolio towards the fastest-growing industries and economies, spreading risk and increase total returns for our investors,” he said.
Threadneedle’s partner in Australia, Certitude Global Investments, reaffirmed that an equity income strategy is a particularly apt solution for local investors looking for international diversification.
CEO of Certitude, Craig Mowll said: “Australia represents only a small fraction of all investment opportunities, and local investors have recognised the need to diversify offshore. However, volatility in global markets is a concern for many Australian investors who want to preserve capital ahead of their retirement years. An equity income solution is therefore well-suited for investors who are looking to capture growth opportunities beyond our shores but still benefit from income that these dividend paying stocks provide.”
