- With another tech major becoming a dividend payer, we look at where big income funds tend to focus
- Allocations to Europe are increasingly in vogue
The decision to pay a dividend for the first time is a milestone for any company, but not without unease in some cases. So it looks with Meta (US:META), which might win over some investors by initiating a payout while also prompting questions about its use of capital at a time of major investment into the artificial intelligence trend.
Meta's choice has implications for a number of funds, including Fundsmith Equity (GB00B4Q5X527), Scottish Mortgage (SMT) and Blue Whale Growth (GB00BD6PG563).
It also matters to the managers of global income funds, who may now feel they have more of a justification for holding one of the leading constituents of the S&P 500. Meta's dividend yield will equate to merely 0.4 per cent, but it's worth noting that other tech giants with modest yields – Microsoft (US:MSFT) on 0.8 per cent and Apple (US:AAPL) on 0.6 per cent – can still crop up frequently in income portfolios; those managers would argue that dividend growth is the important thing.
That is a convenient argument, because global income fund managers often face the dilemma of whether to try to keep up with the US-dominated global equity index by investing in companies that produce sizeable capital gains but generate little in the way of yield, or potentially sacrifice overall returns for the sake of bigger dividends elsewhere. However, private investors do have options, whichever route they choose.
How the big beasts compare
A look at the 10 biggest names from the Investment Association and Association of Investment Companies Global Equity Income sectors shows that portfolios vary significantly by their level of focus on the world's largest equity market. Recent factsheets show that JPMorgan Global Growth & Income (JGGI) makes good use of US shares, with them comprising roughly two-thirds of the portfolio – broadly equivalent to the MSCI World's own weighting, although the trust trades on a forward dividend yield of 3.7 per cent, well above the index's trailing yield of 1.6 per cent.
JGGI's approach explains why it is the only name to have outpaced the MSCI World index by total returns over a five-year period. The trust pays out a proportion of its net asset value (NAV) in dividends each year, meaning the team has no need to chase the highest-yielding names and can instead back stocks that appear to offer meaningful levels of growth. The team has tended to be flexible by both investment style and the sectors it favours, and has notably switched in and out of different parts of the markets during the style rotations of the pandemic years.
That flexible approach does, for now, include a decent backing for some of the big tech plays in the US. The fund has a 7 per cent position in Microsoft, 5.8 per cent in Amazon (US:AMZN) and 3.3 per cent in AI poster child Nvidia (US:NVDA). Top holdings also include Mastercard (US:MA) as well as semiconductor manufacturers Taiwan Semiconductor (TW:2330) and ASML (NL:ASML).
Guinness Global Equity Income (IE00BVYPNY24), another fund with a total return outlook (but the lowest historic dividend in the group), has a chunky exposure to the US itself, although this is derived from a concentrated portfolio of bottom-up stock picks rather than a specific call on the country's stock markets. Like JGGI, it holds shares in companies such as Microsoft and TSMC, as well as European market darling Novo Nordisk (DN:NOVO.B). The team behind the fund tends to simply use dividend payments as one possible indicator of a company having good qualities, others being a record of "past value creation" and capital discipline, rather than chasing yield specifically.
As they put it: "A commitment to a dividend leaves no room for vanity projects or frivolous uses of shareholders' capital." The fund has sometimes served as a counterweight to the MSCI World index and those portfolios with a heavy weighting to US tech stocks: it made a modest but positive return in 2022, a year that saw tech and major benchmarks tumble, but has tended to lag behind in years dominated by big tech gains. It's worth noting this fund is also the inspiration behind the Investors' Chronicle 'Geico' stock screen of dividend-paying companies with world-leading track records of generating capital returns.
Continental drift
Given that many income investors will already hold either UK income funds or FTSE 100 shares directly, it's useful that the most prominent global income funds tend to avoid much overlap here. Evenlode Global Income (GB00BF1QMV61) has around a quarter of its assets in the UK, but no other fund even comes close to that: the domestic market has a diminished presence in these portfolios.
Many of the funds instead make substantial use of European shares alongside allocations to the US. Note that Fidelity Global Dividend (GB00B7778087) has an allocation of some 41 per cent to Europe, with companies such as Deutsche Boerse (DE:DB1), Roche (CH:ROG) and Sanofi (FR:SAN) among its top 10 positions, and no exposure to US tech majors such as Microsoft.
The team tends to seek out "a healthy dividend yield underpinned by a growing level of income as well as the potential for capital growth". The fund typically has a defensive nature thanks to the team's focus on companies with predictable, consistent cash flows and little or no debt, and could serve as a stable holding offering some yield.
However, we should note that, like many funds, it has not always performed as investors may have hoped. The fund exited our Top 50 Funds list last year because our panellists worried it had not proved as defensive as they wished in times of market stress.
Elsewhere, it's notable that many of the funds with higher yields have not fared so well when judged by recent total returns, from the Europe-oriented Artemis Global Income (GB00B5N99561) to the Vanguard FTSE All World High Dividend Yield ETF (VHYL), the only passive option in the list.
The Vanguard fund has around a quarter of its assets in financials, but is very well diversified across geography and sector, with close to 2,000 holdings in the fund. It holds companies paying dividends that are "generally higher than average". Like many global funds that deviate from the approach of a standard tracker, it looks as though it could struggle in periods when a handful of shares (such as tech stocks) dominate returns. On the other hand, the fund did less badly than the MSCI World index in a rough 2022.
