How to invest for income over time

Since we launched the Fidelity Global Dividend fund back in January 2012 we have managed to navigate an ever-changing market backdrop to deliver a stable source of returns for investors.

What am I looking for?

The key to the fund’s success has been a clear and consistent focus on investing in reasonably-valued, robust companies that are able to consistently increase their dividend payments to shareholders over time.

Finding these opportunities is certainly easier said than done – it requires a lot of research in order to get a detailed understanding of each company. I don’t simply invest in the highest yielding or cheapest companies, as a high headline yield can often be a sign of stress in the underlying business.

So while I place significant emphasis on the price I’m being asked to pay for a stock, I also demand certain characteristics from companies to help provide clarity over a stock’s true value and sustainability of its earnings and dividend. These include simple and understandable business models, a predictable and resilient business model, a strong balance sheet and shareholder-friendly management.

Why going global helps

When it comes to finding these types of opportunities, the fund’s global remit is particularly beneficial as it allows me to invest across a large and diverse universe of stocks. The UK’s FTSE All Share, for example, contains around 640 companies, compared with more than 1,600 stocks in the MSCI AC World, the fund’s comparative index.

This also provides attractive diversification benefits. Indeed, many single country equity income funds often face a challenge in that a large proportion of the index’s yield is concentrated in a relatively small number of sectors or even individual companies. However, by investing globally, I can ensure that the fund has exposure to a wider selection of companies, whose earnings and dividends are well diversified across different industries and geographies.

At the broad sector level, healthcare is an example of an area which has historically displayed many of the fundamental characteristics that I look for in potential investments. A number of large healthcare companies, such as GlaxoSmithKline and Johnson & Johnson, are cash-generative, have strong balance sheets and healthy dividend yields.

Dominant drivers of markets

A major feature of market returns in recent years has been the strong performance of such quality dividend payers. This has caused some investors to question valuations in so-called ‘expensive defensives’ or ‘bond proxies’, particularly as investors have started to refocus on the potential for inflation to return and interest rates to finally rise.

My strict valuation discipline has seen me recently reduce or sell some of my holdings in areas like essential consumer products, particularly in the US. That said, I continue to find opportunities in a sector that justifiably commands a premium given the fact that it is home to a number of well-managed, cash-generative businesses with very resilient earnings profiles. Procter & Gamble, for example, is a relatively recent addition that I believe is attractively valued given its portfolio of high quality brands.

Looking ahead

With the economic and political landscape both at home and abroad likely to remain at best uncertain over the coming year, I am confident that the diversification benefits of a prudently managed global equity income strategy can continue to navigate many of today’s risks.

It’s important to note that I do not try to manage every twist and turn in the market. The fund is designed for investors seeking a less risky way of investing in equities, which is why I will remain focused on companies that offer the prospect of attractive dividend-based total returns over the long term.

The views of the author and any people interviewed are their own and do not constitute financial advice. However the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Before you make any investment decision make sure you’re comfortable and fully understand the risks. If you invest in fund or trust make sure you know what specific risks they’re exposed to. Past performance is not a reliable guide to future returns. Remember all investments can fall in value as well as rise, so you could make a loss.