Investors have continued to search for income amid the current volatility, with IA Global Equity Income becoming one of the few sectors to report positive inflows over the past six months, attracting £1.8bn.
But it is not just income investors who have been attracted to the sector this year, as dividends have offered a method of offsetting the damage caused by rising inflation, according to James Harries, manager of the Trojan Global Income fund and Securities Trust of Scotland.
He said that when markets are falling, “the most important question to ask at that point is, how much income does my portfolio generate? If you can cover your expenses with that income, you don’t have to sell out of your funds at an inopportune moment”.
However, Sam Witherow, manager of the JPM Global Equity Income and Global Dividend funds, said that many income managers tend to chase the highest yields rather than companies with the steadiest yield growth, even though the latter is more beneficial in the long term.
“Whereas some of our peers will concentrate more on stocks yielding more than the broader market, we invest across the yield spectrum,” he said. “We think any company that pays a dividend is fair game as long as a lower yield is compensated with much higher growth.”
Here, Trustnet asks income managers for the holdings that they expect to deliver the greatest dividend growth in the future.
Microsoft
Microsoft’s dividend payments of 0.86% may not look the like the most appealing option on face value, but Stuart Rhodes, manager of the M&G Global Dividend fund, said that “its yield does not tell the full story”.
He pointed out “the dividend has more than trebled since 2012, which meant that the true yield on a forward-looking basis was considerably higher”.
The tech giant’s share price is up 283.1% over the past five years alone and it remains a solid overweight position in M&G Global Dividend, at 5.4% of assets.
Despite its long-term success, Microsoft’s share price has dropped 16.7% since the start of the year.
And although it is a mega-cap company owned by thousands of fund managers around the world, Witherow said that Microsoft still offers good value for money.
“We'd still say it’s a very cheap stock and the runway for growing that business is still very high,” he added.
Likewise, cloud penetration is still very early on in its journey and Microsoft is well positioned to benefit from increased take-up, so “even though the yield is pretty low, the absolute dividend is huge”.
The strong dividend growth exemplified by the company is a good source of long-term income, but investors may need to balance it with a higher-yielding holding for more immediate revenue.
Witherow said: “Not all our positions can be like Microsoft because it has around a 1% dividend yield, whereas our portfolio has a 3.2% dividend yield.
“So for every Microsoft with fantastic dividend growth characteristics, we also have to find some high yielding stocks.”
London Stock Exchange
Richard Saldanha, manager of the Aviva Global Equity Income fund, anticipates high levels of dividend growth from London Stock Exchange (LSE).
Dividends have grown by more than 15% per annum over the past five years and Saldanha expects this trend to continue in future, especially with the recent acquisition of Refinitiv.
LSE bought the financial data and infrastructure business for around $27bn in 2021, and its integration should be supported by the holding company’s “highly cash-generative business model”.
The company should also be resilient to the wider volatility in markets, according to Saldanha – rising inflation and tightening monetary policy have presented new challenges to many businesses, but LSE’s share price is up 21.8% since the start of the year.
“We believe this growth can continue even in a slowing macro environment, thanks in large part to LSE’s resilient business model,” Saldanha added.
“With nearly three-quarters of revenues coming from recurring sources such as data analytics, we see a relatively high degree of visibility in terms of cashflows and dividends in the future.”
Aflac
US health and life insurance company Aflac is the pick of Matt Page, manager of the Guinness Global Equity Income fund.
It has increased dividends by 9.2% a year over the past decade, and bolstered payments by 22.1% in 2022.
Page expects this 40-year trend of consecutive dividend growth to continue in future, largely due to the company’s solid customer base in Japan.
Despite being a US-based company, around 70% of revenue comes from Japan, with 95% of its clients there renewing their policies.
Aflac’s Japanese customers typically remain with the company for 20 years, providing a steady, long-term source of revenue.
Page said: “These recurring revenues and cashflows have grown over time due to the aging population.
“Further, the deregulation of Japan’s financial system has allowed Aflac to sell its policies through banks or the post office, where Japanese customers are used to conducting financial transactions.”