The Share Centre urges income investors to go global
Sheridan Admans, investment research manager at The Share Centre, explains the benefits of investing for income and discusses how looking globally can enhance an investor's portfolio.
"The increase in investors seeking income has been driven by changing demographics such as population growth, increase in life expectancy and those reaching retirement leading more active lives. This teamed with the current low interest rate environment is driving some savers to seek income from equities despite this meaning an increase in risk.
"It is likely that investors seeking an income will have some UK single company equity income exposure within their portfolio. Popular stocks that provide attractive income streams with yields of circa 5% are Imperial Tobacco, Centrica, Marston, Vodafone or United Utilities.
The UK and income
"As an investor in the UK, equity income has traditionally been provided by investing the financial services arena, oil, utilities, tobacco and telecom companies.
"The benefit of investing in UK companies is the limited exchange rate risk an individual is likely to suffer on the income distribution and the transparency of the UK's regulatory and political systems.
"The risk of only investing in the UK is the limitation of diversification. The argument for regional diversification within a portfolio is emphasised by the fact that in the UK there are 95 companies that have a market capitalisation over £500m and offer a 4% income yield or higher, whilst globally there are 1,522 such opportunities.
"Investors concerned about the risk of single equities may wish to consider funds such as the Invesco Perpetual Higher Income fund, the Rathbone Income fund and the Fidelity Enhanced Income fund.
Going global
"A global fund provides investors with access to companies, sectors and assets that region specific bias cannot deliver directly and global income managers can get exposure to the best in class rather than being confined to regional options.
"The benefits of investing globally for income include geographical risk diversification, industry diversification and exposure to stronger performing economies and markets.
"Economies such as China and India have been growing fast, often generating national wealth as well as increasing the spending power of their citizens. Having a stake in this changing balance of economic activity provides a good hedge against the prospects of slower growth in more mature economies.
"Investing outside your own country is associated with higher levels of risk, mainly as a result of currency fluctuations, political and market risk and the impact this can have on both income and capital values. However, a fully-diversified portfolio should include some investments from other markets. How much you invest in which markets depends upon the exact level of risk you find acceptable, but global funds are an easy way to broaden your investment horizon if you don't have any particular geographical preference.
"An example of investing in a global fund for diversification may be best explained as follows. Investors in the UK do not have exposure to some developed market sectors, take information technology a sector which is almost monopolised by the US, or market share of the electronic hardware market, which tends to reside in Asian economies. Also, alternative energy development solutions in wind power for example is driving Danish innovation.
"Two funds we prefer that offer global income exposure are the M&G Global Dividend fund and the First State Global Listed Infrastructure fund."