Global equity income funds offer investors attractive yields when capital values are volatile.
While the choices available to cash and bond investors are less than attractive, those who are willing to consider equities and their associated dividend income can find opportunities opening up beyond the UK. Companies in markets around the globe are latching on to the idea of rewarding their shareholders with dividends.
With the eurozone crisis showing no signs of a lasting solution, we could be in for volatile markets for some time to come. Perhaps it is time to batten down the hatches and endure the market fluctuations, whilst picking a healthy dividend income of 4% per annum or more in some cases.
Growth in the UK and other developed markets looks likely to remain sluggish at best. This is evidenced in the woes of companies like Thomas Cook who are unlikely to see the hard-pressed British consumer coming to their aid anytime soon. However British companies that do most of their business overseas on the other hand are doing significantly better. Good examples are GlaxoSmithKline, Vodafone, Diageo and Unilever. These are global consumer product concerns, which, although they are UK based, do the vast majority of their business overseas and a lot of it in more growth-orientated markets.
Remaining cautious in the wake of the global financial crisis of 2008, there are many firms that are holding significant amounts of cash on their balance sheets. They are reluctant to plough these funds into capital expenditure or merger and acquisition activity. Paying out some of that cash to shareholders is a good way of keeping those shareholders on board when markets are volatile. What is more, companies with strong overseas earnings have managed to continue increasing their dividends to levels above those of 2008/2009. This is in contrast to the more UK-centric companies, who have still not generally regained pre-crisis dividend levels.
It is not just UK companies that are jumping on the dividend bandwagon either, historically in the US and Asia, companies may have been more focused on growth, reinvesting any spare cash in the company in order to build capacity, but right around the world, dividends are gaining importance.
Historically there are many reasons why overseas companies have not traditionally been big dividend payers. Family-dominated or corporate ownership structures may have meant that the desires of individual shareholders were important in the eyes of the board. In addition, companies may have been more focused on growth and simply reinvested surplus cash back into their company in order to grow them further. This ethos is now changing and around the world, a dividend paying culture is gaining ground.
With economic conditions likely to remain uncertain around the world, growth in share prices might struggle to make much progress in the short term. Dividends may therefore become the most important element of the total returns available from equity investment and investors who look globally for returns could tap into a useful source of income in difficult times.