The potential to receive an attractive and growing income is likely to become increasingly important in the coming years as investors take advantage of new rules which allow them more flexibility over how they draw their pension. I therefore expect companies capable of paying a high and rising dividend, and funds seeking to invest in such companies, to become increasingly popular.
The Merchants Trust is an investment trust which currently offers an attractive yield of 4.7 per cent and has an impressive record of growing income, with the dividend having been increased in each of the past 32 years. Simon Gergel of Allianz Global Investors has been at the helm since June 2006 and his focus is predominantly on larger, high-yielding companies in the FTSE 100 Index.
Gergel starts by looking for stocks with an above average yield although this alone is never reason enough for buying a company’s shares. An attractive valuation, strong financial position and a competitive advantage are other qualities he looks for.
The wider economic environment and broad themes or trends are also considered in his analysis. These factors will often be the catalyst that causes a company’s share price to rise.
Gergel believes the strong UK economic recovery we are seeing is unsustainable as UK households are still in far too much debt. He therefore has exposure to global businesses with strong franchises and attractive yields, which he believes could perform well even in an environment of slow economic growth. Examples include Glaxo-SmithKline and Royal Dutch Shell.
Gergel also believes inflation in the UK could be higher than anticipated. To provide some protection, he has invested in companies which own “real assets” such as buildings and property.
Among financial companies, he is generally avoiding banks – with the exception of HSBC. He prefers asset management companies such as Standard Life, Man Group and Ashmore, which benefit as their assets under management increase, and companies which benefit from increasing transaction volumes such as IG Group and ICap.
Companies capable of benefiting from increasing consumer spending in emerging markets also feature in the portfolio.
Among the businesses he expects to benefit from this theme are British American Tobacco, Mothercare and United Business Media, a marketing and events company which is seeing strong growth from its emerging market operations.
Since Gergel took over the share price has grown by 78 per cent, with dividends reinvested, compared with 58 per cent for the FTSE 100 index. The trust could be considered by investors seeking a higher yield now from a portfolio of predominantly larger companies although it should be noted that at the time of writing the trust trades on a premium to net asset value of approximately 1.1 per cent.
Mark Dampier is head of research at Hargreaves Lansdown