Chasing yield is suicide, says M&G fund manager

Chasing dividend yield can be "suicide" for investors, says Stuart Rhodes, manager of the M&G Global Dividend Fund, which has delivered top decile returns since launch in the IMA Global Growth sector.

Selecting stock purely on grounds of dividend yield levels can have a ruinous effect on performance, says Rhodes, as investors who chased the high yields in the UK banking sector found to their cost in 2008 and 2009.

"Last year was the worst for dividends in decades. Investors with high-yield strategies were led to companies and sectors where dividends were most vulnerable. Sadly, many high-yielding funds turned out to be the very opposite - low-yielders," he says.

Rhodes insists that dividend growth rather than yield is the key to identifying long-term out-performers. History shows that companies which consistently lift their dividends deliver a better return, even when the impact of dividend reinvestment is stripped out of the numbers.

Cochlear, an Australian manufacturer of hearing aids, is a good example of a company which investors with high-yield strategies would have missed. Ten years ago its dividend yield was 1.5%. Since then Cochlear has increased the dividend each year by an average of 23%. On a ten-year view, the shares were offering an actual yield of 12%. The share price has also tripled over the last ten years.

The M&G Global Dividend Fund is a portfolio of about 50 stocks. Rhodes believes that the prospects for dividend growth of each company in the portfolio are not fully appreciated by the market. The prospective dividend yield is 3.7 per cent, compared with the world average of 2.7 per cent.

Launched in July 2008, the M&G Global Dividend fund has delivered returns of 17.4% per cent, ranking it in the top decile of performers since launch.