Income funds that let investors have their cake and eat it

Cake-ism is not generally associated with investment management. Historically, if an investor wanted a high income, there would be a trade-off on capital growth. If they wanted high growth, typically, it wouldn’t come with a predictable income. However, times are changing – and it may be possible to have your cake and eat it too.

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Credit could be handed to the Magnificent Seven. Ahead of the recent market turmoil in respond to US President Donald Trump’s trade wars their stock market dominance over the past decade has forced other companies into a change in behaviour to become more dividend friendly in an attempt to lure back investors. Dividend investors now have a far broader choice.

Dividend delight

That choice now includes a range of higher-growth companies. Rather than income being confined to a raft of stodgy oil and gas companies, financials or industrials, income can now be generated from a wealth of sectors, and across different regions.

This is particularly evident in markets such as China. After international investors fell out of love with China, many Chinese companies decided to change their approach to capital allocation. Companies that had previously prioritised capital growth started to pay dividends, notably Alibaba Group Holding Ltd ADR (NYSE:BABA) and Tencent Holdings Ltd (SEHK:700). The Henderson Global Dividend index shows Chinese dividends rising 17.8% in 2024, with Alibaba distributing $5.1 billion.

Improving governance in other parts of Asia has also expanded the universe of dividend-paying stocks. Japan’s corporate governance reforms saw its payouts rise 15.5% year on year, while countries such as South Korea have followed its lead with its “Value Up” initiative.  

Even in the US, a number of the Magnificent Seven mega-cap technology companies now pay dividends – including Apple Inc (NASDAQ:AAPL), Microsoft Corp (NASDAQ:MSFT), and Facebook-owner Meta Platforms Inc Class A (NASDAQ:META). In the UK, the weakness in the market has also seen a broader distribution of dividends. Companies in the FTSE Small Cap, for example, now have an average yield of 4.3%, according to FTSE International, to mid-March.  

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The result is that increasingly investors don’t need to choose between income and growth. Equally, as Ian Rees, head of multi-asset at Premier Miton points out, looking for both can lead investors to good companies. He believes that companies that commit to paying a growing dividend over time tend to have good capital discipline, which in turn is a recipe for capital growth.

Markets ‘feel a bit like 2000’

Equally, he suggests, it is a particularly good time to start looking at this type of company. He says it “feels a bit like 2000” as markets start to look at some of the areas that have been left behind in the relentless pursuit of artificial intelligence growth. The market’s focus on a handful of technology names has left plenty of companies that are cheaply valued, paying a growing dividend, that offer a potentially strong trajectory of capital growth.

A generalist global equity income fund with a specific dividend growth target is a good place to start. The Fidelity Global Dividend W Acc fund, for example, is an interactive investor Super 60 investment idea. For investors who want to narrow down their search, George Fox, fund manager on the Jupiter Merlin multi-manager range, suggests the UK as a good starting point.

“The yield on our largest UK income exposure, Man Income, sits around 5% and the fund has delivered this consistently each year over the last couple of years while also growing capital at around the same rate. 

“While total returns in the UK market have paled in comparison to the US over the last decade, a significant proportion of the US market return has come from multiple expansion. Multiple expansion itself does not tend to be a persistent return driver through time and we may well already be seeing the beginning of a reversal in the direction of travel.”

He points out that Man Income has significantly outperformed the global index on a total return basis since the team bought it in 2020, despite the weakness in the UK market. “With Man Income still trading on a low valuation with solid fundamentals, we have real conviction in its ability to continue to generate attractive capital growth and income from here.”

Overseas income

Further afield, the Japanese market gets votes from both Fox and Rees. Rees says: “In Japan, the corporate governance reforms are improving efficiency – companies had been bloated and inefficient, but that is changing. Dividends are an important part of that.”

Ress thinks leadership will broaden out from the index heavyweights and likes the Chikara Japan Income & Growth fund, which is run by Richard Aston with an explicit dividend growth mandate.

Fox likes the WS Morant Wright Nippon Yield fund, which has a dividend yield of around 3%. He adds: “Benefiting from a return to economic growth and inflation in the Japanese economy, Japanese corporates are also undergoing significant structural reforms.  Part of this is the reduction in the significant cash piles which have built up on the average Japanese corporates’ balance sheet, funds which are now being invested for growth, paid out in dividends or used to buy back their own shares.”

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The broader Asian markets have been a useful source of income and growth for investors. In particular, Asian technology companies such as Taiwan Semiconductor Manufacturing Co Ltd ADR (NYSE:TSM) have a long track record of paying dividends, so Asian Equity Income funds have tended to have a different flavour to UK, US or European income funds.

Dan Cartridge, fund manager at Hawksmoor Investment Management, believes this is a good hunting ground. “Payout ratios across Asian equities are around 40%, meaning dividends are well covered by earnings and there is a good amount of capital being reinvested by businesses to drive future earnings and capital growth. Asian equities present a huge opportunity set for fund managers to exploit, offering diversification by country, sector, currency and market capitalisation.”

He says that the focus on the US technology giants has seen many Asian stocks left behind, which is creating a fertile hunting ground for active managers. He likes CIM Dividend Income, which has paid out a yield of over 6% of starting asset value every year since its launch in 2001.

Look to high-yield bonds

Is it possible to get income and growth from bonds? The income is nailed on, says Rees, but the capital growth can be trickier: “The only way to get capital growth from bonds is by buying bonds below par. The income is fixed, but good managers can find overlooked income or bonds.” He believes there can be points in the cycle that this strategy works and points where it doesn’t. Nevertheless, funds such as the Jupiter Monthly Income Bond fund have delivered long-term capital growth and a consistent income.

Fox adds: “The clear winner over the last couple of years has been the high yield market…we invest in the Aegon High Yield Global Bond and Jupiter Global High Yield Bond. 

“The managers of both funds are positioned relatively defensively and have strong track records of adding value through their credit selection, hopefully providing us with added protection should the current market volatility worsen.” 

It would be remiss not to mention the investment trust “Dividend Heroes” – these are funds that have increased their dividend for 20 consecutive years or more. Some, such as Scottish Mortgage Ord (LSE:SMT), Henderson Smaller Companies Ord (LSE:HSL) or Schroder Income Growth Ord (LSE:SCF) have also delivered very strong capital performance. This can highlight some ideas for investors who want their investments to offer income and growth.

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It is a rare cake-ism moment in global stock markets. The unwinding of the mega-cap technology trade has exposed the opportunities elsewhere in markets. Investors don’t have to choose between income and growth. There are plenty of areas that will deliver both.