Defensive dividends

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Jonathan Wright - Fidelity Personal Investing

4 January 2019

With Christmas behind us and perhaps a renewed enthusiasm for some healthy eating and exercise on the agenda, now is as good a time as ever to get our finances in order too.

However this year it certainly feels a lot harder as volatility has made an unwelcome return, with markets yo-yoing as investors try and determine the impact of the US/China trade wars, a retail rout on the high street and an uncertain Brexit outcome, now less than three months away.

It’s at times like these that we need to remember some of the golden rules of investing: the importance of taking a long-term view, drip-feeding money into the market in stages and diversifying across companies of different sizes and geographical regions.

Another important aspect, often overlooked, is the role dividends can play during uncertain times.

This is particularly pertinent at the moment as recent stock market falls mean the average yield, or dividend income, from FTSE 100 companies now stands at 4.8%. Though not guaranteed, this valuable income can act as a powerful buffer to counteract falls in asset price levels. If income is reinvested you’re able to buy more shares at a lower price, too.

One outcome of the recent uncertainty has been a weaker pound. The downside to this is that imports are more expensive and our holiday money doesn’t go very far. On the positive side though it has made our exports cheaper and boosted the profits of multinationals based in the UK.

It is these multinationals that make up the majority of the dividend-paying companies featured in the FTSE 100 index. A lot of their income is generated abroad meaning the recent weakness in the pound has enhanced the value of their profits, meaning dividends paid in sterling are more affordable for the company and reliable for the investor.

If diversification in your portfolio is one of your resolutions for this year, it’s also worth remembering you’re not just restricted to UK-based, FTSE 100 companies to provide a decent income. According to the latest Janus Henderson Global Dividend Index Report only 9% of all global dividends paid in 2017 were from the UK.

This means there are plenty of other opportunities around the world to source dividends. While changing exchange rates will affect the amount paid to you, investing globally gives you access to the dividend potential of those companies not listed in London, from tech stocks in the US to leading pharmaceuticals in Europe.

The easiest way to invest in these types of companies is by a managed fund that looks specifically for companies with a history of paying regular dividends, otherwise known as ‘equity income’ funds.

The Select 50 offers a range of equity income funds from those with a focus on the UK, like the Fidelity Enhanced Income Fund and JOHCM UK Equity Income Fund, to the Invesco European Equity Income Fund with its focus on Europe and the JPM US Equity Income Fund with its focus on the US.

For those wanting to go global it’s worth taking a look at the Fidelity Global Dividend Fund and Invesco Global Equity Income Fund.

With interest rates still at record lows, it’s clear to see why these types of companies have proven popular with investors. If the income is reinvested, it’s an easy way to smooth out some of the bumps we may see along the way this year.

If only keeping my other resolutions was that simple.

Investment Outlook webcast

This Wednesday, 9 January at 12pm Tom Stevenson will be sharing his latest Investment Outlook in a live webcast. Save the date in your diary.

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Overseas investments will be affected by movements in currency exchange rates. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.