There are sound reasons for choosing a global equity fund for income. Portfolio Managers Ben Lofthouse, CFA, Alex Crooke, and Job Curtis share why they remain cautiously optimistic on the prospects for global dividends.

Why should investors consider investing in dividend-paying equities now?

Rate hikes to combat rising inflation following a period of ultra-low interest rates may tempt investors to squirrel their money away in an interest-bearing savings account. But that would mean missing out on two important advantages of dividend-paying equities: dividend and capital growth potential over time. Plus, in periods of sustained higher inflation, regular income from investments can help soften the blow of the higher cost of living and mortgage rate increases.

During past periods of rising inflation and rising interest rates, equity valuations often begin to stagnate or even decline in terms of P/E (price-to-earnings) ratios. In these times, dividends have formed an important part of returns as investors are “paid to wait” for markets to pick up.

In 2022, a strong positive was the strength of dividend growth as some companies that rebased their dividends because of COVID-19 increased them again, leading us to consistently upgrade our dividend expectations. As of 3Q22, 90% of global companies raised dividends or held them steady. Looking ahead, dividends generally look well covered by profits, and we believe this should provide support for payouts even as the global economy slows.

What are the benefits that the Fund can bring to an investor’s overall portfolio?

The Global Equity Income Fund aims to offer its investors a steady income stream and capital growth by investing in global, high-quality, dividend-paying equities.

Given the scarcity of yield, we believe in the present environment of weak global economic growth, higher inflation, and general macro uncertainty, the Fund’s steady history of distributing income and strong risk-adjusted returns make it an attractive option for investors seeking sustainable income. The Fund pays out a quarterly dividend to investors.

In general, the combination of reinvested dividend income and capital growth has led to long-term outperformance of higher dividend-paying companies. Investing globally provides the potential for risk reduction through global diversification; in fact, over the last 20 years, the highest dividend-yielding region has been outside the U.S., which is why the Fund’s typical maximum allocation to the U.S. is 25%.

How does the Fund seek to generate sustainable income?

The Fund aims to invest in businesses that offer an attractive dividend yield with opportunities for dividend growth, while also ensuring cash flows remain sustainable with good dividend coverage (defined as the number of times a company can pay the current year’s dividend from the current year’s earnings). A company’s ability to consistently pay out dividends goes a long way towards communicating its fundamental strength and sustainability to shareholders.

In our view, the only way to consistently be able to offer a high and sustainable level of equity income is through investing globally. Having the flexibility to invest in companies from different regions allows us to not only take advantage of different macro environments, but also capitalize on the seasonality of dividends. Our specialized regional rotation strategy helps the Fund benefit from the tendency of European and Asian companies to pay dividends annually or semiannually, rather than quarterly.

What is your outlook for the Fund?

Inflationary pressures, tightening monetary policy, and slowing global economic growth, alongside ongoing geopolitical uncertainty, continue to weigh on investor sentiment, leading us to be cautiously optimistic.

Dividend cover remains high on a comparative historical basis and dividend growth looks positive, while the broadness of dividend growth suggests that it could continue into 2023.