How soon will UK companies reinstate their dividends?
In the six months since the global pandemic forced the UK government to shut down the economy,...
One benefit of lockdown has definitely been fewer people out and about when we’re walking the dogs in the mornings. We’ve even met (at a distance) a group of other dog owners, all thankful our dogs can still run off some steam – so they can sleep whilst we work from home.
Naturally, after a few weeks, the normal ‘small talk’ dries up and the conversation shifts to “What do you do for a living”? My husband has it easy: no sooner do the words “primary school maths teacher” leave his mouth they become disinterested. I, however, have everyone thinking they’re the next investment guru while I politely nod and make sure the dogs haven’t run off.
But the conversations have made me realise that investing is not a ‘one size fits all’ approach – everyone has their own theories, ideas and goals. Which leads me on quite nicely to this week’s lesson of how to determine your investment style when you’re just getting started and everything is overwhelming.
“Know what you own and know why you own it.” — Peter Lynch, mutual fund manager and philanthropist
Investment funds can very generally be put into two broad categories: those looking to produce and income and those looking for growth. Generally, a growth fund aims to increase the value invested over time, whereas an income fund targets a steady stream of income. This income can be paid out to investors or re-invested. But like most things in life, it is often not as clear cut as this, and many funds will attempt to provide both.
A fund’s stated aim will determine what they invest in, so it’s important to understand the process beforehand. For example, equity income funds may look to invest in companies that pay dividends, which can then be redistributed, such as GAM UK Equity Income or Schroder Income. The one thing to remember about dividends is that they are discretionary, so they can be cut, suspended or cancelled – the payment is not guaranteed. So careful stock-picking is required.
Alternatively, bond funds such as GAM Star Credit Opportunities or Liontrust Monthly Income Bond can also produce an income. These tend to be lower-risk investments than shares and the bond’s coupon (or interest) is contractual, so will definitely be paid unless the company or government that has issued the bond goes bust.
In contrast, growth funds might invest in companies that don’t pay dividends at all. Instead they’re placing greater priority on long-term capital growth. This could mean the companies are reinvesting in their businesses rather than distributing money to shareholders. Good examples of this are T. Rowe Price Continental European Equity and Invesco Asian.
But growth funds can also target an income – such as Baillie Gifford Japanese Income Growth fund. Likewise, some income funds can also aim for capital growth, for example Montanaro European Income or LF Gresham House UK Multi-Cap Income.
All this isn’t to be confused with accumulation and income share classes, which we discussed last week, regardless of its growth or income orientation, a share class refers specifically to what you are doing with any income earned, not the fund’s overall aim.
For millennials, probably a mix, because it will help you diversify your portfolio. You’ll have a long time horizon, so long-term capital growth will be attractive. But if you like the idea of income-producing funds, you can also choose to reinvest that income and make the most of compounded returns.