Dividend pay-outs surge

Tom Stevenson
Tom Stevenson
Fidelity Personal Investing20 November 2017

Dividends are growing faster than at any point in the past three years, according to the latest Janus Henderson Global Dividend Index.

In the third quarter of 2017, pay-outs to shareholders increased by 14.5%, reaching $328.1bn, which is easily the highest level ever for this period of the year. Even stripping out special dividends, which were particularly generous this year, and the distorting impact of currency shifts, the underlying rate of growth is an impressive 8.4%, the best in two years.

In a low-interest-rate environment, equity income continues to be a fantastic source of yield. No wonder that this investment class remains so popular.

Delving into the detail, the US is still the engine of dividend growth. North American dividends represented $4 in every $10 paid out in the third quarter. Growth in the US and Canada was 9.2% and 11.0% respectively. Closer to home, the UK put in a strong performance, up 17.5% thanks to the mining sector and a tailwind from sterling’s devaluation.

On the back of the latest quarterly figures, Janus Henderson has now upgraded its forecast for the full year to a new record total pay-out of $1.25trn, up more than 7% on 2016’s total.

With dividends growing all around the world, there has never been a better time to be an equity income investor. With the global economy enjoying a synchronised upturn and company profits rising, growth is feeding through into high dividends.

Compared with the paltry returns available for cash investors, equity income looks particularly attractive. The yield on the FTSE 100 is currently 3.9%, against which the 0.5% interest rate in the UK pales into insignificance.

The income from shares has always provided the lion’s share of total returns from equity investment over time. With income growing so strongly, it has never been a more important component of the total return mix. Dividends rise and fall over time but they are much less volatile than share prices. Investing in dividend-paying shares can therefore smooth returns as well as enhance them.

The Select 50 list of our preferred funds offers a good range of equity income funds.

In our home market, these include:

The Fidelity Enhanced Income Fund. This fund builds on the underlying dividend offered by its already high-yielding shares by selling the option to buy some of its shares to other investors. The premium it earns by doing this results in a yield of more than 6% currently, although this is not guaranteed.

The JOHCM UK Equity Income Fund. This is a more ‘vanilla’ income fund but still currently offers a yield of more than 4%, although also not guaranteed.

In overseas markets the range of income funds includes two strong global funds:

The Fidelity Global Dividend Fund, managed by Dan Roberts since 2012. This wide-ranging fund has holdings in Asia, Europe and the US with a particular focus on reducing downside price risk.

The Invesco Perpetual Global Equity Income Fund is managed by Invesco’s chief investment officer, Nick Mustoe.

Finally, we like the Invesco Perpetual European Equity Income Fund, which benefits from Stephanie Butcher’s strong stock picking as well as an exposure to a region of the world that we think has an attractive growth and valuation profile.

Important information

The value of investments and the income from them can go down as well as up, so you may not get back what you invest. When investing in overseas markets, changes in currency exchange rates may affect the value of your investment. The Select 50 is not a recommendation to buy or sell a fund. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Investors should also note that the views expressed may no longer be current and may have already been acted upon by Fidelity. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.