High yields often end in tears. Here’s how we find income winners

TL;DR

Dividend growth, rather than high dividend yield, can lead to better long-term income and capital growth for investors.

Transcript

foreign interview video series today I'm joined by James Dao who is full manager of the Bailey Giffords responsible Global Equity income fund James thanks for your time today thank you for inviting me income funds have different approaches some Target high yielding dividend shares While others focus more on dividend growth and are less concerned ab... Read More

Key Insights

• ✋ Focusing on dividend growth, rather than high dividend yield, can result in better long-term income and capital growth.
• ✋ High-yield stocks from mature and cyclical businesses may carry higher risks, making dividend growth stocks more resilient for income investors.
• 🥺 Sacrificing some yield for dividend growth can lead to more attractive long-term outcomes and better portfolio resilience.
• ✋ Cash and bonds may offer higher yields in the short term, but equity income investments can provide better growth and protection against inflation.
• 🖐️ Responsible investing considerations, such as ESG risks, play a role in portfolio construction for equity income funds.
• 💚 Artificial intelligence and the green energy transition are viewed as long-term investment themes with strong potential for growth and dividends.
• 🔬 Investing in companies with a history of dividend growth can enhance returns and generate resilient income for investors.

Questions & Answers

Q: Why does James Dao focus on dividend growth instead of dividend yield?

James believes that dividend growth leads to better long-term income and capital growth, as opposed to higher-yielding stocks, which are often from struggling, mature businesses with high risks.

Q: How does James convince income seekers to invest in a fund with a lower yield?

James suggests that income seekers should consider the totality of returns, including capital growth, rather than solely focusing on yield. By sacrificing a bit of yield, investors can potentially benefit from higher capital growth in the long term.

Q: How does James make the case for global equity income compared to cash and bonds?

James highlights the impact of inflation on cash and bonds, indicating that while cash rates may have increased, they may not keep up with inflation. He argues that investing in equity income, despite a lower yield, can provide better long-term growth and increased spending power.

Q: Does James invest in other US technology companies besides Microsoft and Apple?

No, James explains that they focus on responsible behaviors and ESG risks as part of their investment criteria, which may exclude certain companies like Facebook. They also prefer companies that pay dividends, making Microsoft and Apple more suitable for their portfolio.

Q: What is James's perspective on artificial intelligence as an investment theme?

James considers artificial intelligence to be a genuinely transformational technology with potential long-term benefits. He mentions companies like Microsoft, TSMC, and Schneider Electric in their portfolio that are likely to benefit from AI.

Q: Are there other themes in the portfolio besides artificial intelligence?

James mentions the green energy transition as another theme they believe in. They have invested in companies such as Albemarle and a wind turbine company, anticipating long-lasting growth and dividends from the shift toward renewable energy.

Q: Does James have personal investments in the responsible Equity Income Fund?

Yes, James confirms that he has a significant portion of his savings invested in the fund, which consists of growth companies that meet responsible standards.

Summary & Key Takeaways

• James Dao explains that focusing on dividend growth, rather than dividend yield, can result in more resilient outcomes and better capital growth over the long term.

• He highlights the risks associated with high-yield stocks, such as mature and cyclical businesses, and suggests that sacrificing a bit of yield for dividend growth can lead to superior returns.

• James uses Microsoft as an example of a company with a lower dividend yield but strong dividend growth, which has outperformed high-yield stocks in terms of income and capital growth.