Searching for rising global dividends

Companies whose earnings and dividends rise over time often make excellent investments. M&G Global Dividend Fund aims to back them for the long term.

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  1. Rob Morgan

Dividends are perhaps the most important feature of investing in equities, but they are sometimes overlooked. Not only do they form an integral part of overall return, but companies whose earnings and dividends rise over time will likely have strongly-performing share prices too. In contrast, those that disappoint investors with static or lower dividends often see their share prices punished.

Identifying companies with growing dividends is the goal of equity income fund managers, yet some such as Stuart Rhodes of M&G Global Dividend Fund would prefer not to adhere to the constraints of an equity income sector. This would dictate that his fund yields above a certain amount. He prefers the freedom of selecting companies with lower yields but the capacity to grow them quickly. The fund therefore resides in the IA* Global rather than the IA Global Equity Income sector like most of its peers.

Mr Rhodes categorises his portfolio into three “buckets”: “quality”, “assets” and “rapid growth”. Quality” companies are those with disciplined and reliable growth strategies that can thrive despite what is going on in wider economy. This includes more defensive areas such as pharmaceuticals and food producers. “Assets” are economically-sensitive businesses whose earnings are less consistent but should still trend higher over time – energy or commodities companies for instance. Finally, in the “rapid growth” category are companies whose pace of expansion (and dividend growth) has the potential to surge thanks to a strong growth in a new market or product line. This is usually the smallest of the three components but one that provides important diversification and differentiates the fund from many of its peers.

Over much of the past few years Mr Rhodes has considered many of the companies falling into the “quality” category to be quite expensive. Defensive areas such as consumer staples have attracted investors looking for safe, stable cash flows. However, more recently he has been able to find some value, with PepsiCo, Unilever and Starbucks all added to the portfolio during 2018. He also used weakness in the technology sector to invest in Taiwan Semiconductor, a stock he has held in the past. Patiently waiting for the right price to introduce, or re-introduce a stock to the portfolio is a hallmark of Mr Rhodes’ approach.

A timely reduction to the tobacco sector helped fund the above purchases with British American Tobacco accounting for most of this. Mr Rhodes is happier keeping hold of Imperial Tobacco, which has less debt; however, legislative uncertainly clouding the sector has still been a drag on the fund’s returns over the past year. Overall, the “quality” category accounts for about for about 50% of the portfolio, which is in the middle of its historic range of 40% to 60%.

The increase in the “quality” category was primarily funded by a reduction in the “rapid growth” component from around 20% to 15% over the course of 2018. Mr Rhodes used the market wobble in the immediate aftermath of the election of Donald Trump in 2016 to purchase the likes of Nike and Mastercard. These faster-growing firms have since performed well both in terms of growing their dividends and share price appreciation, and he chose to offload the holdings as valuations became richer. He states that he remains admirers of these firms and would look to repurchase if the share prices weaken in the future.

The remaining 35% of the portfolio invested in the “assets” bucket has also seen some notable changes in the past year. Energy and materials exposure has reduced, albeit Methanex is still the largest holding. At times the world’s largest methanol producer has suffered from fluctuating demand that caused considerable share price volatility, but overall it has benefitted the fund’s performance. The most recent dip comes after Mr Rhodes reduced the position but it is still sizable at about 7%. The area growing in significance in this category is what Mr Rhodes identifies as “cyclical tech”. In particular, he seized the opportunity to purchase semiconductor stocks Tokyo Electron, and Lam Research as well as device maker Samsung amid recent market volatility.

Our view

Since the launch of the fund in 2008 Mr Rhodes’ philosophy of backing companies that grow their dividends while avoiding high yielders whose pay outs don’t growth or, even worse, shrink, has been largely successful. The fund has been able to increase its pay outs to investors healthily, and given its well-rounded approach Mr Rhodes has been able to outperform in a variety of market conditions – although it has also endured periods of underperformance and past performance is not an indication of future returns.

We continue to believe the fund is an attractive proposition for those seeking a rising income, with the current yield of 3.1%, variable and not guaranteed. It continues to form part of our Foundation Fundlist of preferred investments across the major sectors.

*Investment Association

Past performance is not a reliable guide to future returns. This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in fund and other collective investments should only be made after reading the Key Investor Information Document or Key Information Document, Supplementary Information Document and Prospectus. If you are unsure of the suitability of your investment please seek professional advice.

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