Why you should look global for income

INSYNERGY Investment Management chief executive officer Spike Hughes outlines the benefits of international exposure for income investors.

I have always loved the equity income story. Equity income has served UK investors incredibly well for decades.

In many ways, it has been a lazy way of investing and that is a major part of its appeal.

One could invest into a UK equity income fund and enjoy a reasonable starting yield and an inflation beating pay rise most years as company dividends edged higher, in line with earnings growth.

What’s more, as share prices tend to follow earnings and dividends, investors’ capital grew too and as time elapsed, they found that they were enjoying an income of 15% per annum on the capital initially invested and that their capital had risen several fold.

Today, UK equity income funds form the backbone of many investors portfolios and I am sure they will continue to do so.

Centre of excellence

The UK is home to some excellent companies with long histories of paying rising dividends. Unfortunately, a portfolio with nothing but UK equity income funds does bring some significant potential risks. We are all too aware of risks that were previously viewed as black swans but then a whole herd or eyrar of black swans arrived simultaneously. Regardless of which collective noun you use, they both proved to be equally painful!

A vast swathe of the UK equity income stream disappeared almost overnight with the loss of dividends from Royal Bank of Scotland, HBOS, Lloyds, Barclays et al.

Just as UK equity income funds were coming back off the ropes, they were hit by a hay-maker when BP’s spill forced them to suspend their dividend.

It is amazing to think that roughly $1 in every $7 of FTSE 100 dividends were lost just because of BP.

We can all hope that the UK Equity Income sector has now had its run of bad luck. However, when you X-ray most funds in the UK Equity Income sector, you find a lot of the same companies– Glaxo, Shell, BAT etc. While I do not want to cast doubts about such fine companies, we all recognise that their activities each carry very specific risks.

Risk reduction

To reduce some of these stock specific risks, I believe that it is wholly sensible that people are now considering income stocks globally. It would be ridiculous to imagine that all of the world’s best companies are based on a small island off the North West corner of Europe. I have no doubt that truly outstanding businesses such as Coca-Cola, McDonalds, Johnson & Johnson, Colgate Palmolive, Nestle and others should have a place in every investor’s long term portfolios.

These companies have rock solid brands that have withstood many business cycles over many decades and have in most cases delivered largely unbroken dividend growth. Just to give one example, Coca-Cola’s dividend in 1980 (which is as far as my Reuters will go back) was 9c per share. Last year it was $1.76 per share. Pretty amazing dividend growth from a company that was already very mature in 1980.

Warren Buffett famously takes a long-term view with regards to the length of his investment horizon. He has held companies such as Coca-Cola for decades. Stock markets have had thousands of good and bad days since he first bought Coca-Cola shares but by being able to look beyond the market noise, he has been able to hold onto a stock that has multiplied his income and capital many times.