Stuart Rhodes, manager of the M&G Global Dividend Fund, explains why he believes there is a world of opportunity beyond the UK market for equity income investors.
Why should UK investors be thinking about dividends in global terms?
Primarily, because the investment opportunities are so limited in the UK. The top five dividend payers in the UK provide nearly half of the market's total dividend distribution. By contrast, the global universe offers more, and I would argue better, opportunities for dividend yields and dividend growth. It's very important for investors who want a genuinely diversified fund to be looking internationally for dividend opportunities.
What characteristics do you look for in dividend stocks?
I look for companies that have long-term potential for dividend growth rather than buying stocks with the highest dividend yield. Performance comes from companies that are disciplined enough to pay a rising dividend over time. So I'm trying to identify those that offer good dividend growth as well as a reasonable yield.
Why would you say now is the time to be buying into global dividend stocks?
Dividend investing is a sensible way of investing that creates and builds wealth. The strategy has a long track record going back, for example, more than 100 years in the US, and I would say it should form a part of anyone's investment portfolio. By investing in the best dividend-paying companies globally, investors are gaining access to the companies that should outperform over the long term. Right now, I think there are opportunities to invest in companies with some wonderful dividend growth prospects at pretty decent dividend yields, which has not always been the case.
Do you favour any countries in particular?
The US has by far the best dividend discipline in the world; nearly 100 US companies have increased their dividends each year for 25 consecutive years compared to just three in the UK. As a result, the US will always be well represented in the portfolio. Dividend-paying companies can be found around the world but two countries in particular are worth highlighting. Australia and Brazil have tax and legal systems which encourage companies to pay dividends. Therefore, dividend discipline is firmly entrenched and the yield prospects there look good at the same time.
What about sectors and companies?
The consumer goods sector contains many world-class companies that provide good returns year after year and have raised their dividend consistently over time. Utilities, on the other hand, tend to have decent dividend yields but limited opportunities for dividend growth, so they don't fit my strategy of investing in companies that can grow their dividends consistently over time.
As for individual companies, there are many examples I could give, but Coca-Cola and Johnson & Johnson stand out. Their dividend track records are extremely impressive - among the best in the world - with more than 40 years of consecutive increases. This demonstrates fantastic discipline which is the important point. Companies that pay rising dividends are naturally disciplined because the money available for investment in the business is focused on the best projects. The likelihood of those companies wasting money on unprofitable projects is therefore limited. These types of businesses have historically been rather expensive but at the moment you can buy them at really quite attractive prices.
Finally, on a five-year view, how confident do you feel as a global dividend investor?
Very confident, but I'm even more confident on a 10- to 15-year view, purely because of the powerful effects of compounding. Equity income strategies have been very popular in the UK but investors need to start thinking seriously about broadening their options to find companies that are growing around the world. History shows that dividends account for the bulk of total returns from equity investments over the long term. Dividend investing clearly works and over the next five, 10 or 15 years, investors can be confident that the strategy will provide a favourable tailwind.
To hear Stuart Rhodes' views first hand, watch his videos at www.mandg.co.uk/iview
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