Disruptive technologies are having a real impact on our lives, from the way we do our food shopping to ordering a taxi.
Looking ahead, we believe businesses which are responding positively to disruptive technologies – and upsetting traditional business models in the process – have the potential to become attractive dividend payers.
The US stock market is not only home to a number of businesses which are growing their presence in disruptive markets, it also provides investors with opportunities to invest in companies which pay regular dividends to shareholders. This underscores the attractions of US equity income in comparison to traditional fixed income.
Faced with the 2007-08 financial crisis, central banks in much of the developed world were forced to intervene and stimulate growth, keeping interest rates at historic lows for much of the past decade. This has created challenges for fixed income investors, particularly those who traditionally relied on government bonds to provide a consistent source of income. This is because loose monetary policy caused government bond prices to rise and yields to remain low (as the two move inverse to each other).
In addition, fixed income investors are unable to benefit from income growth over time because the yield they receive is, by definition, fixed. Shares, on the other hand, have the potential to deliver dividend growth. Coupled with regular dividend payments, this provides investors with an opportunity to grow their savings over time.
Dividend growth and the reinvestment of dividends represent a powerful combination for investors over the long term. A look at the S&P 500 from 1940 to the end of 2017 reveals that dividend reinvestment and the effects of compounding (effectively receiving interest on your interest) accounted for more than 40% of the index’s returns.
The tech winners
Thanks to technological disruption, we believe there are a number of sectors which have the potential to deliver income for investors in the future. The first is the technology sector, where many innovative start-ups offer new and exciting technologies. Meanwhile, well-established IT companies are also benefiting from organisations looking to upgrade their systems and processes.
We’re also finding that an increasing number of technology firms focused on software, networking and hardware are using cash to pay dividends, contrary to the notion that IT firms can add value to investors only via their growth potential. We believe this trend will continue, as shareholders are increasingly willing to reward the management teams of mature IT companies for paying dividends.
Improvements in life expectancy may have created challenges, but they have also created opportunities within the healthcare sector. Older populations tend to require more healthcare than younger populations, and healthcare spending in the US is predicted to climb 5.5% on average every year between 2017 to 2026 . Companies that are able to participate in this trend, while also improving their efficiency to counter rising costs, may be poised to benefit.
Healthcare innovators should also thrive in today’s markets. The US government’s Food and Drug Administration (FDA) is approving more drugs and at a faster pace than before, so pharmaceutical manufacturers which are able to deliver new products ultimately stand to reap the rewards.
Interest rate boost for banks
The banking sector is also on our radar - although this has less to do with disruption and more to do with changing economic cycles. Interest rates in the US have crept up; at the first policy meeting in 2019, the Federal Reserve held the target range for the federal funds rate at 2.25% and 2.5%.
We believe that banks are well placed to benefit from higher short-term US interest rates. They take deposits from savers in exchange for interest payments and then lend to borrowers at a higher rate. This business model should generate higher profits, as interest rates rise and act as a suitable hedge against inflation for income investors. At the same time, some of the US’s big banks have high levels of capital on their balance sheets, which should insulate them from any market shocks.
In summary, there is an opportunity to share in the successes of companies which are building a presence in disruptive markets. Investors looking for long-term income and growth may benefit from reviewing their portfolio and considering the impact that investing for dividends might have.
For more information on this investment trust and how to access the opportunities presented by disruption, please visit here[LA1].
The opinions expressed are as of April 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative. There is no guarantee that any forecasts made will come to pass.
Please remember that capital growth values may fluctuate and the level of income may vary from time and is not guaranteed.
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