Why a lower yield can mean income for longer

The key, it seems, is sticking to long-term quality over short-term income - Mr Roberts targets high-quality, dividend-paying stocks that will deliver growth as well as income.

"A pitfall for many income managers is to chase yield in a part of the market where they shouldn't be, and end up facing dividend cuts and poor capital performance," explains Mr Roberts. "We want to generate a healthy stream of income that can grow over time. The extra quality of dividend we are producing comes at a price - our headline yield is a bit lower [than the peer group]."

When the fund launched in 2012 the yield was about 4 per cent, which was lower than the peer group. "But we struck it at that level because we didn't want to chase yield," says Mr Roberts.

Three years later he was vindicated. In 2015, nearly 60 per cent of global equity income funds cut their dividends as falling commodity prices hurt many funds' payouts. But between 2015 and 2016 Mr Roberts increased his fund's dividend by 8 per cent. And in 2016 the fund increased its dividend by 16 per cent, although this was due in large part to the impact of weak sterling.

Today Fidelity Global Dividend yields 2.9 per cent - the same as the Investment Association Global Equity Income sector average. But in recent months Mr Roberts' focus on quality stocks has cost him top ranking in his sector. In the second half of 2016 investors turned against bond-like stocks en masse in favour of cyclical stocks and higher-risk value plays, leaving Fidelity Global Dividend trailing its peers. Fidelity Global Dividend returned 22.6 per cent over 2016, but lagged behind the IA Global Equity Income sector average of 23.2 per cent and MSCI All Country World Index's return of 28.7 per cent. This means that over one year to the present the fund is in the fourth quartile of this sector in terms of performance.

However over three years the fund is the third-best performer in its sector and Mr Roberts says the sell-off in quality stocks has meant he has been able to pick up his favourites at low prices. These include Wolters Kluwer (NL:WKL), a Netherlands-headquartered information services company, which has recurring revenue of 78 per cent and a healthy balance sheet with low debt and high margins. But in the second half of last year, as bond yields rose, the market de-rated its shares.

"The share price fell by over 20 per cent in a three-month period, but nothing had changed about the business," says Mr Roberts. "Because it was considered low-beta, resilient, quality, defensive and all of those terms that get applied to bond proxies, it suffered in the rotation [to value]."

Mr Roberts, a former accountant and self-confessed "geek" exhaustively analyses companies' balance sheets in order to decide how resilient their businesses and how stable their operating margins are, and to determine the extent to which they will be able to continue paying dividends throughout market and business cycles.

He runs a portfolio of around 50 stocks selected from a universe of more than 2,000 and makes sure that he is not overly reliant on income from any one holding - something easier to achieve when scouring the globe for income rather than just the UK market. Just five companies accounted for almost 40 per cent of the UK's dividend haul in 2016.

Around 60 per cent of the Fidelity Global Dividend's yield comes from 20 stocks, which include well-known consumer names Diageo (DGE) and Procter & Gamble (US:PG), as well as British American Tobacco (BATS) and GlaxoSmithKline (GSK).

The income is also well diversified by country, with 31 per cent coming from the US and 14 per cent from the UK, as well as from countries including Australia, Switzerland, Spain and France.

Mr Roberts is also enthusiastic about Japan, which provides 7 per cent of the fund's income, despite the fact that Japanese companies have tended to hoard cash on their balance sheets rather than pay it out to investors. But he says that is changing.

Fidelity Global Dividend's Japanese holdings include tyremaker Bridgestone (JP:5108), which announced in February 2017 that it would buy back 6 per cent of its stock to try to improve the value of the company. Mr Roberts says companies are taking shareholders into account "more and more" and that in the meantime Japanese shares remain cheap.

Around 10 to 15 per cent of the fund's assets are invested in stocks with sub-market yields, meaning it holds both high income payers which may not continue to grow, and lower income payers with the potential to pay much higher dividends in the future.

He says: "In the vast majority of those sub-market-yield stocks we would expect the dividend to grow by double digits quite rapidly."

Performance (% total return)

Source: FE Analytics, as at 6.03.17

Source: Morningstar, *Fidelity

Source: Morningstar, as at 28.02.17

Source: Morningstar, as at 28.02.17