The recent fall in stock markets provides an opportunity for investors to invest in solid dividend payers willing to take a longer term view. Many companies able to demonstrate sustainable sales and earnings growth in a challenging economic environment are on very attractive dividend yields.
In comparison the banking sector is not yet broadly investable for equity income investors principally because many of the banks are not paying a dividend and are not about to start anytime soon.
In this latest PM Perspective, Michael Clark, manager of Fidelity’s Money Builder Dividend fund, believes the ability to pay and grow dividend payments is an excellent barometer of corporate health and an effective means of capturing long-term value from the stockmarket and outlines where he is finding opportunities.
Banking shares are not one of these sectors
“Since 2008, I have has a very negative view on banks. My exposure to the banking sector is largely confined to HSBC. I was convinced enough of the valuation attractions to add to my investment in HSBC, when it fell below £5 a share.“
“I think it is too early to make serious investment in the broader European banking sector at the moment. Of course, many of the banks are not currently dividend payers, and this will remain the case for the next few years.“
“With continuing pressures on residential house prices, commercial property prices, and net interest margins from low interest rates, I feel that banks will struggle to return to a decent level of profitability for some time.“
Investment approach focused on dividends
My view is that “investing in stocks that pay dividends, and more pointedly, grow their dividends, is the best way of capturing value from stock markets over the long term.“
Academic analyses of long-term returns consistently point to the fact that investing in dividend-paying stocks and reinvesting the income is a very rewarding strategy thanks to the magic of compounding. With the benefit of time, investing in income shares begins to look like investing for growth.
For investors reinvesting dividends, an investment in equity income is best judged over a longer-time period, over which the power of compounding has time to work.
Unfortunately, investors have become very myopic in recent years and have great expectations for growth even over short time periods. Yet, there is much to commend in the opposite approach: invest in income-yielding shares and forget about the short-fluctuations…
