> Specialist Outlook> M&G Global Dividend Fund
Stuart Rhodes, fund manager of the M&G Global Dividend Fund, explains his approach to dividend investing and discusses the importance of having a balance between different kinds of investments to try to ensure good performance in varying market environments.
My approach to dividend investing differs from that of most traditional income fund managers in that I prefer to concentrate on companies that can consistently grow their dividends, rather than those that simply offer a high yield. Historically, businesses that have increased their dividends over the long term, wherever they are in the world, have performed better than companies that do not make regular payments to their shareholders.
In my opinion, dividends provide the ultimate indication of a firm's financial self-control and commitment to shareholder value. A business cannot support a rising dividend stream without sensible long-term growth in its operations. By contrast, an emphasis on dividend yield seems to be a flawed strategy since a high dividend yield can actually be a sign that a company is in trouble or has limited growth potential.
In order to reap the greatest benefit from dividend investing, I believe strongly that investors should incorporate a global search for opportunities instead of focusing solely on the domestic market. The UK is a highly concentrated market and the lion's share of dividends is paid by just a handful of large companies. By broadening their emphasis, investors can benefit from flexibility of choice and valuable diversity.
The natural hunting ground for companies offering consistent dividend growth is among high quality stocks – large multinationals with strong market positions and steady cashflow that enables them to increase their dividends year after year. These 'dividend bankers', which include the likes of methanol producer Methanex and US healthcare products supplier Johnson & Johnson, make up the majority of the fund.
However, one of the most important features of my investment approach is that, in contrast to many conventional income funds, I do not confine myself to companies with defensive characteristics. Although these shares tend to perform well when equity markets struggle, they can lag when markets rally. Consequently, I also select stocks in more economically-sensitive industries or those that are exposed to structural trends –called the 'assets' and 'rapid growth' categories.
Having a balance between defensive, cyclical and rapid-growth companies is my way of coping with the headwinds that dividend strategies face naturally. By constructing the portfolio in this way, I believe the fund should be able to deliver strong returns over time as it benefits from the compounding effect of regular outperformance.
For example, in the second half of 2011, when investor sentiment turned extremely negative, quality stocks held up very well and I was able to realise profits in those companies less reliant on robust economic growth. I then took advantage of lower share prices to reinvest in economically sensitive or rapidly expanding businesses that I believed were undervalued. As equity markets recovered in the new year, these companies benefited as investors rediscovered their risk appetite. Now that sentiment has deteriorated once more, the fund's solid base of top quality multinational businesses are again proving supportive.
I am encouraged that, despite the difficult economic environment, many companies in the fund continue to deliver healthy dividend increases. This reinforces my confidence that a consistent approach to dividend investing, concentrating on how companies are actually run, will reward patient investors over time.
Prices may fluctuate and you may not get back your original investment. For Financial Advisers only. Not for onward distribution. No other persons should rely on any information contained within. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Services Authority and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776
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