Global Equity Income October 2012

Equity income funds have performed particularly strongly recently and this has generated considerable publicity, while there have also been a number of new products launched. However, they are not just a short-term fad, but rather a valuable long-term strategy. Indeed, there is a good body of research, comparing the performance of high yield stocks against the overall market, which supports our view that high dividend strategies consistently perform well or indeed outperform. Societe Generale, for example, has looked at the performance of markets over the past 20 years and found that, while on a year-on-year basis income strategies can underperform, on a rolling three-year return basis there is no period over the past 20 years when a high dividend strategy has underperformed the world market (see Figure below).

We are also see increasing demand for income products, reflecting increasing population growth and changing demographics – people have longer and more active retirements for which they need to provide. Yet yields in bond markets are extremely low, among both government and corporate bonds. Consequently, equity markets are perfectly placed to fill investors’ needs, delivering attractive yields that are typically superior to those found in these bond markets. Moreover, and this is particularly important for pensions and longterm savings, the income stream generated by equities grows over time, while the income from fixed income is exactly that – fixed, thus an investor’s purchasing power is eroded over time by inflation. Certainly, dividend growth has outstripped inflation over the past 20 years, thus supporting purchasing power. Another positive feature of equities is that they hold the potential for capital appreciation so that not only can the income stream rise, the value of your holdings could also rise. In conclusion, we believe equity income strategies have a very important role to play in the savings market.

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