Apple stunned Wall Street in January with mouth-watering figures for sales and profits, and revealed it is now sitting on a cash hoard of $100bn (£63.2bn). But the iPhone giant is not alone in enjoying vast reserves of cash in the bank; despite the economic gloom, corporates across the world are surprisingly healthy and able to pay bumper dividends. Is now the time to switch from a savings account paying a miserable 1%-2% into a fund of shares that pays out an annual income of 4% or more?
Fidelity, the world’s biggest investment management group, thinks so. This week it launched a Global Dividend fund, which it is confident will pay investors an income of around 4% a year. Meanwhile Schroders is heavily promoting its Asian Income fund, while Liontrust, a relatively small investment “boutique” which has enjoyed strong performance in recent years, is also launching a fund for small investors to earn dividends from companies in the far east.
The idea behind the rush of fund launches is simple: why rely just on British companies listed on the London Stock Exchange to earn dividends? After the Gulf of Mexico disaster, BP’s dividend cut was a huge blow for income investors as, at the time, it made up around 12% of all the dividends paid out by UK listed companies. Dan Roberts, manager of Fidelity Global Dividend, cites Microsoft as typical of the companies that should be good income payers. “It has been a reliable dividend payer for over a decade. It has managed to grow its dividends as well. The company has a $40bn cash pile and a market capitalisation of $220bn. Given this very robust and sustainable earnings profile, Microsoft can offer a stable dividend, and one that might grow in the future.”
Even in Japan, long-regarded as a low dividend payer, he says companies such as cycle components maker Shimano now pay out healthy dividends. Meanwhile Schroders, using “covered call options”, manages to achieve a 7% income on its Asian Income Maximiser fund.
But don’t dump your cash Isa just yet. In a cash Isa or deposit account, the capital is guaranteed, even if the interest paid is paltry. In a fund, the underlying value of shares will rise and fall, and only savers who already have their rainy day money put aside should consider equity (share) funds. The average UK equity income fund has lost 1.1% of its capital value over the last five years, although global equity income funds have gained 14.3%.
“The extra choice is welcome for income seeking stock market investors, but there are potential risks. Dividend culture is far less ingrained in overseas markets compared with the UK, increasing the likelihood of dividend cuts when profits fall. And most Asian markets tend to be more volatile than the UK, which could give cautious income investors sleepless nights. Currency movements can also affect returns for better or worse,” says financial adviser Justin Modray of Candid Money. He rates Aberdeen World Growth Income and Newton Global Higher Income for more cautious investors.
One enthusiast for overseas dividends is financial adviser Brian Dennehy at Dennehy Weller. “There are 123 companies with a yield in excess of 3% on the UK stock market, but 879 on world markets. With more than seven times as many opportunities around the globe, you must spread your net wider.” He likes Newton Global Higher Income, MG Global Dividend and Artemis Global Income.
The MG and Aberdeen funds win the vote of Darius McDermott of Chelsea Financial Services. He says: “Recent research found that just five UK companies made it into the top 100 global companies based on yield, whereas 15 came from North America, 14 from Asia and 45 from western Europe. We predict that by 2020 the retired in the UK might be surprised at the extent to which they become dependent on Asia for income.”
Financial advisers do, of course, have an interest in telling you to buy funds, as they earn commissions of around 0.5% of your money every year it is invested. The fund managers and other fee earners take another 1%-1.5% (although most of the dividend figures quoted above are net of charges).
There are other ways to boost your income from savings without jumping headlong into shares. Savers can lock their money into fixed-rate bonds where the capital is guaranteed, with the best-buy deals (Yorkshire building society, Clydesdale Bank, BM Savings) paying 4.7% a year. Bond funds, which invest in the corporate debt of companies rather than shares (and are further up the list of creditors), should be safer than equity funds, and in recent years have performed well. The average global bond fund has made a capital gain of 53.6% over the past five years.
How to Invest
The minimum investment in most funds is £1,000. Go here for Guardian Money’s guide to investing. Never pay initial charges of 5%-6% – buy through a discount broker. Try h-l.co.uk or www.chelseafs.co.uk, or a fund supermarket such as fundsnetwork.co.uk (run by Fidelity). To find a financial adviser, try unbiased.co.uk.