How global blue chips could help retiree income

Income-starved investors could look overseas to boost dividend income with global stalwarts that can afford to keep paying out, according to a leading UK fund manager. Scores of Australian companies – like many overseas – are suspending or cutting shareholder distributions.

Returns from leading Australian income funds have fallen into negative territory over the last 12 months, major banks continue to slash derisory savings rates and there is a deteriorating outlook for fixed income funds investing in corporate and government debt.

London-based Ian Mortimer, portfolio manager of Guinness Global Equity Income Fund, which has about $1.8 billion under management, says a longer-term strategy might be to focus on global sources of dividend income.

“Why limit yourself to local market dividends?” asks Mortimer. “The COVID-19 crisis has shown in sharp relief the weakness in focusing on dominant local banking and commodity stocks. Why exclude companies like Microsoft and Nestle from your dividend opportunity set?”

The fund is run by Guinness Asset Management Global, established in 2003 by Tim Guinness, a member of the eponymous centuries-old brewing and investing family that continues to be among the richest in the world.

Mortimer is a founding manager of the multi-award-winning 10-year old fund, which is seeking to expand its presence in Australia’s $2.7 trillion superannuation sector.

The global fund, which selects its 35 stocks without the influence of index weightings from around 500 candidates, is designed to provide dividend income at all times by investing in companies that can maintain payments.

"You are far better off in a growth company paying out lower dividends than investing in a company with low growth paying high dividends."
Ian Mortimer, portfolio manager

It has avoided the worst of the cuts so far and is down about 3.7 per cent since January compared to peers down 11 per cent. None of the holdings in the portfolio have cut or stopped paying dividends. Mortimer expects to keep paying a 3 per cent yield.

“Our portfolio targets companies with enough cash to be in the best position to pay,” says Mortimer.

Australian investors need to remember, says investment strategist Giselle Roux, that global dividend yield is significantly lower than in Australia, nor are there franking credits. She is a strong advocate of retirees seeking income not only from dividends but capital gains. "You are far better off in a growth company paying out lower dividends than investing in a company with low growth paying high dividends," she adds.

"Investors need to understand there is a balance and both are right: you can have local shares and franking credits and you can balance that with global stocks, dividends or growth."

Shortage of cash

Companies are cutting or cancelling dividends either because of a shortage of cash thanks to the slowdown or they're reluctant to make payouts due to economic uncertainty or regulatory pressure.

NAB and ANZ cut or suspended dividends for 2020 after a request from the regulator. CBA shareholders will have to wait until August when the bank is due to report. Sectors caught in dividend cuts include airlines, travel, construction, retail and energy.

Mortimer says 50 per cent of the Guinness portfolio is in consumer staples and health care companies. By contrast, this sector makes up about 20 per cent of the MSCI Index.

Key companies include tech giant Microsoft, consumer goods group Procter & Gamble, fund manager BlackRock and food and drink conglomerate Nestle.

There’s renewed focus on income-generating assets because retirees say the COVID-19 crisis has slashed their income and they are calling on the federal government to consider changes in the age pension, deeming rates and the Commonwealth Seniors Health Card.

The Reserve Bank of Australia cash rate has fallen to 0.25 per cent and the 10-year government bond yield is 0.87 per cent.

The top rate for a $100,000 12-month term deposit is 1.65 per cent from Judo Bank, ME and Qudos Bank.

Major banks such as ANZ, NAB and Westpac continue to slice savings rates. ANZ recently cut its rates for Online Saver and Progress Saver by about 15 basis points following earlier cuts in March and April.

On Monday, CBA cut between 0.05 per cent or 0.10 per cent from all its term deposits.

No Surprises

“There can hardly be a surprise that savers and retirees are looking for stronger returns in different asset classes and, in so doing, are confronting their risk appetite,” says Steve Mickenbecker, group executive for Canstar, which monitors fees and rates.

Of the income funds invested in Australian shares covered by fund monitor Morningstar, the top performer over 12 months to the end of May is Colonial First State’s Wholesale Imputation fund, which lost 2.62 per cent. Over three years the fund – which seeks income from dividends, franking credits and capital returns from Australian shares – returned 7.7 per cent, according to Morningstar.

The worst performer in the income funds monitored by Morningstar was Russell Investments High Dividend Australian Shares ETF which lost nearly 18 per cent. Over three years it was down just over 2 per cent.

Alternatively, fixed interest managed funds offer investors a regular income for a specified term with the expectation that the principal will be repaid at the end of the term, or maturity date.

They invest in a wide range of instruments, including corporate bonds, government and semi-government bonds and short-term unsecured debt.

Colonial First State's Firstchoice Australian Bond Fund has a 12-month return of about 6.58 per cent to the end of April. It charges 0.47 per cent annual fees, or $470 on a $100,000 investment.

Australian Ethical Investments's Ethical Fixed Interest Fund posted a return of 5.49 per cent over the same period. It charges 0.10 per cent annual fees, or $1000 on a $100,000 investment.

Difficult to replicate

But these returns are likely to be difficult to replicate from the current low point in the interest rate cycle, says Mickenbecker.

“The risk profile is higher with corporate bonds and other asset-backed securities in fixed interest fund portfolios. Four per cent-plus returns are going to be very hard to replicate,” he adds.

Another option for retirees facing financial shortfalls is to apply for “accelerated access” to capital in their home.

Household Capital is offering a $20,000 drawdown on home equity. “We know retirees are doing it tough and facing reduced incomes due to shrinking super balances and investments,” says chief executive Joshua Funder.

Applications for the $20,000 finance package will be fast-tracked, with the funds typically available within two weeks, he says. Regular interest repayments are not required, and applicants can pay back the money at any time without financial penalty. The cost is 1.5 per cent of funds drawn.

By contrast, applications for the federal government’s Pension Loans Scheme must be made through Centrelink, with estimated wait times of up to nine months, and payments only available in twice-monthly instalments.

Original article on The Australian