Not one hot spot
Global equity income funds have access to the widest range of opportunities, and managers such as Bruce Stout, who runs the Murray International investment trust, argue that no one region is better than another. "It is less important where a company is domiciled and much more about what it does, if it is a market leader and whether it can maintain its dominance so that it can grow its profits and dividends," he says. If one region of the world has difficulties, for example a pull-back in consumer spending, then there is always the option of finding something elsewhere.
Global funds allow access to areas for which there are not many specific regional funds – for example, the US or Australia. "The US is the leading light, and Australia is also one of the best," says Stuart Rhodes, fund manager of the M&G Global Dividend Fund. "In these markets, you can find the most profitable companies and there are quite a few of these in Asia, too."
While the average yield for the overall US market is low if you strip out technology and financials, the yields are much higher. The US boasts 92 companies that have a track record of increasing their payout every year for 25 years.
That said, even though Europe has faced a difficult economic period, some companies have continued to raise their dividends, and "the cuts in payouts [for others] in 2010 highlight an opportunity – the opportunity for profitable, very cash-rich companies to rebuild their payouts," says Brian Dennehy, managing director of Dennehy Weller.
Europe is projected to pay the highest dividends of any region over 2011, with 10 per cent growth projected for payouts over the next two years.
Asia ex Japan contains 30 per cent of all global businesses paying dividends in excess of 4 per cent, as well as being likely to enjoy strong economic growth over the medium to long term. "Many companies in this region have embraced the notion of strong and rising dividends because they are in a position to do this," says Mr Stout. "Even in Japan, there are now quite a few companies which have raised their payout ratio from the low 20s to the mid 40s."
However, Japan funds such as Jupiter Japan Income, which currently yields around 2 per cent, do not offer such a high yield as global, European and Asia ex-Japan funds. Darius McDermott, managing director at discount broker Chelsea Financial Services, says you could include this fund, which has made good total returns, in your portfolio for Japan exposure, but not as part of the income component.
He prefers Asia ex-Japan funds. Over 10 years the payout ratio for these companies has been 40 per cent plus – broadly in line with western Europe. "There is also a much wider choice than 15 years ago, when only Australia paid dividends," says Jason Pidcock, fund manager of the Newton Asian Income Fund. "Companies in Hong Kong, Thailand, Singapore and Taiwan are also paying dividends."
Things to watch
One of the main risks with equity funds investing overseas is currency fluctuations, which means that payouts could be negated or accentuated by exchange rates, and therefore make an overseas income fund more volatile than a UK equity income fund. However, over the long term currency moves in a well diversified global fund tend to cancel each out over the years, according to Mr Stout.
While payout ratios overseas have improved, the culture of matching or raising dividends is still not as ingrained as in the UK, and yearly payouts may be calculated differently, meaning more variation than with a UK fund. For example, in some countries such as Brazil, the payout is set as a percentage of the earnings, so if these fall the dividend will too.
Three choices for investors
Overseas equity income funds fall into three main categories: global, European and Asian. There is no special fund sector dedicated to these so you will find open-ended funds in the Investment Management Association's global growth, Europe ex-UK and Asia ex-Japan sectors.
Global income funds include M&G Global Dividend, which doesn't offer the highest yield among global income funds, but made above average total returns in 2009 and 2010. When looking for an income fund the highest yielder at a given moment is not necessarily the best, and the benefits of high dividends will be negated if the fund is making heavy capital losses.
But the M&G fund was launched less than three years ago so it does not have a long track record.
There are three global income investment trusts – Murray International, British Assets and Scottish American. By far the best performer over three and five years is Murray International in terms of its net asset value (NAV) and share price return, and it is also well ahead of FTSE World ex-UK and FTSE All-Share indices.
However, investors have spotted this – Murray International trades at a premium to NAV in excess of 3 per cent. Buying an investment trust at a premium is less of problem if you intend to hold it for the long term, however, as its superior returns should compensate for this over time.
Some growth orientated trusts offer a high yield, including Majedie and Midas Income & Growth.
You can also access global dividends via an exchange traded fund (ETF): db-x-trackers Global Select Dividend 100 ETF. This low-cost fund has a total expense ratio (TER) of only 0.5 per cent and late last year yielded more than 5 per cent. The fund tracks 100 of the higher-yielding stocks in the Dow Jones STOXX Global 1800 Index, allocating to the highest-yielding stocks in the Americas, Europe and Asia Pacific, with 40, 30 and 30 components allocated to each region respectively.
To tap into high-yielding Canadian companies, you could buy Middlefield Canadian Income Trust which yields more than 5 per cent, has delivered strong positive returns over one and three years, and is on a discount of more than 15 per cent. But oil and gas companies account for more than half of its assets, which means it could be subject to the price of these commodities, and therefore volatile.
The fund also delivers its return via a swap, exposing shareholders to counterparty risk, and there are some concerns that the income is not sustainable. However, this is priced into the discount to NAV, argues Mick Gilligan, head of research at broker Killik & Co.
For Asian income, Newton Asian Income offers a yield of more than 5 per cent, and is also the top performing Asia ex-Japan fund in terms of total return over one and three years.
There are three Asian income investment trusts: Aberdeen Asian Income, Henderson Far East Income and Schroder Oriental Income. Aberdeen Asian Income offers the best total returns over the long term, although yields less than 4 per cent in contrast to Henderson which offers 4.5 per cent. However these two trusts trade at a premium to NAV.
For an ETF option, iShares Dow Jones Asia Pacific Select Dividend pays quarterly dividends and yields nearly 4 per cent. The ETF tracks its index closely in the short term and has actually done better than it since its launch in June 2006. As well as only holding 30 shares, it is geographically concentrated with more than 50 per cent in Australia, although well diversified in terms of industry sector. Its TER is less than 0.6 per cent.
There are around 10 European income funds that offer yields between about 2.45 and 5 per cent. The highest yielder is Newton European Higher Income which offers in excess of 5 per cent, while Ignis Argonaut yields just under 5 five per cent.
There is not such a good choice of investment trusts, although JPM European offers an income share class which yields 4.5 per cent and an above-average total return over three years.
ETF options include db x-trackers Euro Stoxx Select Dividend 30 and iShares Select Dividend 30, which have TERs of 0.3 and 0.4 per cent respectively. Although this index only has 30 stocks it is well diversified across eight industry sectors, and the companies are mostly listed in the healthier parts of Europe.
Don't ignore emerging markets
A recent addition to the equity income arena has been emerging markets funds – not an area traditionally associated with income. Last year's launches included investment trusts JPM Global Emerging Markets Income and Aberdeen Latin American Income, the Somerset Emerging Markets Dividend Income Fund and Jupiter Global Emerging Markets – all of which will seek "a decent dividend payout at all levels of market capitalisation".
"An emerging markets equity income fund is legitimate if managed well and is not out to grab assets quickly," says Jason Pidcock, fund manager of the Newton Asian Income Fund. "This area should grow."
His fund, though focused on developed markets, includes exposure to countries including the Philippines and Thailand.
But, as with other emerging markets funds, these are higher risk. "Emerging markets equity income funds do not fit the risk level of the typical income investor, or anyone who is cautious, so make sure you are comfortable with the risk," says Darius McDermott, managing director, at discount stock brokers Chelsea Financial Services.
Bruce Stout, fund manager of the Murray International investment trust, adds that to get exposure to emerging markets you do not need to buy companies listed on those markets; you could buy a multi-national listed in a developed market that derives a substantial part of its revenues from emerging markets instead – and these can be accessed via a diversified global equity income fund.
