Interactive Investor

Jeff Prestridge: these dividend generators are back in vogue

5th July 2022 13:42

Jeff Prestridge from interactive investor

Dividends are like a comfort blanket in difficult times, and our columnist thinks income hunters should look in this area in they want a good night’s sleep.

Readers of the esteemed newspaper I work for love their dividends. They can’t get enough of them, whether to boost their income in retirement or to use them to reinvest and increase their shareholdings.

Lovely jubbly is the consensus view on divis and it’s not hard to understand why many people feel so inclined. Lovely jubbly rocks.

Although dividends don’t grow in straight lines - and the terrible (horrible) year that was 2020 resulted in companies (understandably) cancelling them - they’ve bounced back over the past two years.

And when stock markets are as volatile as they have been so far in 2022, it’s comforting to receive a steady stream of income, quarterly or half-yearly. Soothing ointment to ameliorate the pain of volatile equity prices. To contextualise, the MSCI World Index has fallen more than 20% this year.

Of course, the economic challenges that lie ahead - most notably, inflation, rocketing energy bills in the autumn and higher interest rates - could well see dividend payments come under pressure again.

But there will still be companies with pricing power out there that should be able to keep profits moving upwards and their divis in growth mode.

Many investors have been brought up on a UK basket of dividends - and over the years have enjoyed some solid returns from a vast array of UK equity income investment funds (more than 80 at the last count).

But in recent years, such funds have had to spend time in the shadows as more growth-oriented funds have had their time in the limelight - think investment trust Scottish Mortgage (LSE:SMT), think investment house Baillie Gifford - but I sense that income is back in vogue. It’s a comfort blanket in difficult times.

Yet, while the UK stock market is still a rich source of dividend income, the divi is now a global phenomenon. As an income investor, it pays to have an international perspective.

Better corporate governance means many Far Eastern stock markets are now providers of dividend income as are some emerging markets.

Also, we mustn’t forget our allies across the Atlantic either.

While we tend to view the US stock market through the prism of tech stocks such as Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOGL), Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), there are a number of dividend-friendly companies in the US. Companies such as Colgate (NYSE:CL), Johnson & Johnson (NYSE:JNJ), Procter & Gamble (NYSE:PG) and PepsiCo (NASDAQ:PEP) - all with annual dividend growth records going back at least 25 years. All constituents of the S&P500 and commonly referred to as dividend aristocrats.

An interesting report on divis was released a couple of days ago from investment fund overseer Link Group. It concentrated on the dividends that stock market listed investment trusts pay their shareholders (not funds – OEICs or unit trusts). 

In the first quarter of this year, Link Group said that income from equity-oriented investment trusts was 4% higher than in the equivalent quarter of 2021. In the year to the end of March, income payments totalled £1.85 billion - around the level of the previous year.

What I found particularly fascinating about the report was its highlighting of a number of points that make investment trusts a good choice for income hunters. Namely, the geographical variety in their income mandates and the emergence of trusts generating income from alternative assets (for example, renewable energy, infrastructure and private equity). These alternatives now collectively generate more dividends than stock market listed equity income trusts.

Yet it’s the ability of trusts to draw on income reserves built up over the years that make them so investor friendly. These storage tanks of income ensure the dividends paid to shareholders by equity income investment trusts don’t tend to be cut as viciously as individual stocks – or for that matter UK equity income funds (OEICs and unit trusts), which aren’t permitted to have the income storage facilities that trusts possess.

Indeed, the investment trust community have their own dividend ‘aristocrats’, although they tend to be known as dividend ‘heroes’ (a little OTT, me thinks). Seventeen investment trusts have more than 20 years of annual dividend growth under their belt – seven of which have records going back 50 years or more. The likes of City of London (LSE:CTY), Bankers (LSE:BNKR) and Alliance (LSE:ATST).

Pretty impressive. Lovely jubbly.

Jeff Prestridge is a freelance contributor and not a direct employee of interactive investor.

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