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How dividends can protect your investment

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

If you’re invested in a global dividend fund take note, growing corporate profits around the world have pushed the amount of dividends paid in the second quarter of this year to a record $513.8 billion.

How dividends can protect your investment

However, while dividends have hit an all-time quarterly high, the slowdown in the world economy and the impact that has on corporate profits has begun to make an impact. According to the latest Janus Henderson Global Dividend Index Report, the pace of year-on-year growth was the slowest for more than two years at just 1.1%, compared with 14% this time last year.

This summer volatility has made an unwelcome return both at home and abroad, 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 the effects of the UK leaving the EU at the end of October.

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.

Looking at the UK, the average yield, or dividend income, from FTSE 100 companies currently stands at 4.75%. 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 weakness in the pound has enhanced the value of their profits, so dividends paid in sterling are more affordable for the company and reliable for the investor.

If your investments aren’t well diversified, 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 research only 8% of all global dividends paid in 2018 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 expected to remain low for the time being, 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 road ahead.

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. Investors should note that the views expressed may no longer be current and may have already been acted upon. 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.

 

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