Keep your nest egg growing – by going global

The FTSE’s had a bad week. But there’s still a world of opportunity out there...

THE threat of a global recession is hanging over stock markets like the sword of Damocles, but it should not stop investors seeking income from a portfolio of shares bought for the long term. Tomorrow, asset manager Janus Henderson will publish research confirming that, despite the uncertainty gripping share prices, total dividend payments from stock market-listed companies across the globe are at record levels.

Though it reports smaller dividend increases across a range of companies, and a rise in the number of cuts, it is still confident that global dividends will this year grow by at least 4 per cent – ‘a significant opportunity’ it says for investors given the current low interest rates.

This forecast, Janus goes on to say, takes into account a slowdown in the world economy putting pressure on corporate profits. Dividend payments, it adds reassuringly, tend to be more stable than company profits.

What the report also highlights is that investors must not be parochial in their search for income. Instead, they should be prepared to look both inside and outside the UK.

Not only is dividend growth stronger in parts of the world such as Japan and emerging markets, but in absolute terms all the world’s regions that are monitored by Janus delivered more dividend income in the second quarter of this year than the UK.

Diversification is therefore the best way forwards. As Moira O’Neill, head of personal finance at fund platform Interactive Investor, says: ‘Increasingly, the rest of the world is serving equity income investors better than it used to.

‘By including dividend-paying companies from overseas in their portfolios, investors can spread their income net and dilute risk.’

HOW TO SECURE GLOBAL INCOME

THE easiest way for investors to obtain broad exposure to international dividends is via a global investment trust, where the manager i s focused on delivering income or, even better, income growth for shareholders. This is on top of capital return.

Income-oriented global trusts are more dividend-friendly than their global fund counterparts.

This is because these stock market-listed vehicles are able to build income reserves that they can later draw upon to top up dividend payments to shareholders if the economic and corporate backdrop deteriorates and the businesses they are invested in are struggling to maintain dividends. This means they are able to smooth income payments.

The result is that a number of global investment trusts have dividend growth records going back more than 20 years. They include Alliance, Bankers, BMO Global Smaller Companies, Brunner, F&C, Scottish, Scottish Mortgage and Witan – all of which pay dividends every quarter.

Income-minded investors need to be aware that while the regular payments on offer from these trusts have a good chance of growing over time they are not always mouth- watering. In percentage terms, they equate to less than 3 per cent a year. But this is still far better than the income available from traditional savings accounts – and of course there is the opportunity to benefit from long-term capital returns.

Higher levels of income are available from other global trusts, but they do not have the same longstanding record of annual dividend growth. Examples are Murray International and Henderson International I ncome, both paying annual income equivalent to nearly 4 per cent.

Brian Dennehy, founder of FundExpert, is a fan of global trusts with an income bent. He says: ‘There is a big world of income opportunities beyond the UK stock market that many investors overlook and as a result miss out on.’

Yet he is wary of some trusts because of their high exposure to the US, a market he believes to be seriously overvalued – more so, he argues, than before the stock market crash of 1929.

Global trusts with less of their assets in the US than rivals include Murray International (18 per cent), Scottish American (26 per cent) and Witan (20 per cent).

Dennehy also likes investment fund Fidelity Global Dividend, which has 27 per cent of its assets in the US. Although unable to squirrel away income like trusts, this fund has increased its income in five of the past six calendar years and offers an annual income equal to 2.7 per cent.

Another attribute is its focus on capital preservation, a trait that O’Neill at Interactive Investor says lends itself to being a ‘good core income holding’.

GO FOR INCREASED REGIONAL RETURNS

AS WELL as global trusts, investors should look at funds focused on obtaining income from specific regions or markets.

Experts particularly like some of the income funds investing in Asia ( such as Henderson Far East Income, below) and Japan. Darius McDermott, director of Chelsea Financial Services, and Ryan Hughes at AJ Bell both like investment trust Schroder Oriental, with its annual income of 3.9 per cent.

It has grown its dividend every year since its launch in 2005 and now pays quarterly rather than half-yearly, as before.

Dennehy says investors should also consider funds Liontrust Asian Income (paying an income of 4.5 per cent) and BNY Mellon Asian Income ( 3.5 per cent). He adds: ‘Asia is home to vast, growing middle- class populations, countries with little debt, and innovative companies with the potential to increase productivity – driving up profits and dividend payments.’

Japanese income fund favourites include Morant Wright Nippon Yield (paying 2.9 per cent) and Baill i e Gifford Japanese I ncome Growth ( paying 2.2 per cent) – which are favoured by Jason Hollands at wealth manager Tilney and McDermott respectively.

DON’T FORGET BRITISH STOCKS

FINALLY, despite the increasing income appeal of global equities, experts believe that funds investi ng i n dividend- friendly firms listed on the UK stock market should not be dismissed.

Hollands at Tilney says: ‘The UK remains one of the best stock markets for dividend-seekers. It is currently promising an annual income of some 4.9 per cent, higher than Europe (4 per cent), emerging markets (3.4 per cent), Japan (2.8 per cent) and the US (2.1 per cent).

‘Yes, income investors should supplement their exposure to UK dividend-generating companies with overseas funds, but UK equity income funds should be the cornerstone of their portfolio.’

Dennehy agrees, saying that there are ‘ great income funds in our backyard’ – for example, JO Hambro UK Equity Income, which he says has grown its income in nine out of the past ten years and offers an annual income of 4.7 per cent.

UK equity income trusts City of London, JPMorgan Claverhouse, Murray Income and Merchants all have more than 35 years of dividend growth behind them – and attractive income yields of 4 per cent or higher.