Each week, a professional investor tells us where he'd put his money. This week:Guy Monson of the Sarasin Global Higher Dividend Fund.
Jane Austen's Mrs Bennet knew the importance of securing investment income. In the early chapters of Pride and Prejudice, she remarks upon the attention drawn by "the report which was in circulation within five minutes of [Mr Darcy's] entrance, of his having ten thousand a year". Anticipating, perhaps, the deflation of the middle half of the 19th century, she foresaw that her daughters must prioritise security of income over security of capital if they were to live their lives in the style she hoped for.
Many of Mrs Bennet's dilemmas arise again today investors and savers are increasingly hungry for income and yet are faced with record lows in UK interest rates alongside the risk of rising inflation. We would argue that the solution today is the dividend stream available from a diversified portfolio of global equities, with an emphasis on good governance, quality, and management commitment to dividend rises.
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Why, after the strong rally in global income stocks, are we still so keen? First, global equities offer dividend yields that are at, or close to, all-time highs relative to the yield offered by their respective government bond markets. Second, corporate profitability remains robust enough to generate dividend growth that's still above national inflation rates. Finally, global dividend stocks offer diversified currency streams that can protect investors from an economic shock in any one single economy (eg, Britain, where thanks to the vote for Brexit, and the subsequent fall in the pound, investors will now receive a windfall rise in global dividends translated back into sterling). What we are looking for is equities that behave like bonds that is, they provide reliable and consistent income streams, but that offer income growth even in a time of rising interest rates.
A key holding for investors wanting to achieve this is JP Morgan (NYSE: JPM), arguably the highest-quality US bank franchise. Its shares yield 2.7% and dividends have grown by 18% a year compounded over the last five years. Note, too, that the bank's profitability is likely to rise with higher interest rates.
UK insurer Admiral Group (LSE: ADM) is another holding that has grown dividends by 26% a year over the last ten years and now yields near 6.4%. As a leading player in UK motor insurance, it also has a strong presence in domestic and international price-comparison sites and an enviable record of cost control.
Finally, one of our more specialist positions is in the dominant maker of German spectacles and lenses, Fielmann AG (Frankfurt: FIE). The shares offer a yield of 2.4%, growing at 8% a year over the past five years. Given the demands of an ageing population and growing myopia problems among the young (thanks to too much use of mobile-phone screens and the like), the drivers of future growth remain robust.
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