Finding companies that make profits and use them wisely is key to investing success over the long run.
Profits can be reinvested back into the business to drive growth or paid to shareholders as dividends. The best management teams do both – balancing reinvestment and growth to boost the share price, while increasing dividends.
Dividends and time are your best friends.
You can take dividends from investments, which can be useful if you’re retired and missing regular income from a salary.
Or, you can use the dividends to buy more shares which generate even more dividends in future. This is important if you’re not yet thinking about retirement, but looking to build a nest egg, for example.
Some people call this ‘investing for income’. Really, it’s just investing. It’s the very essence of why you buy shares. To benefit from companies’ long-term success and receive your share of their profits.
Simple? Yes. Easy? Not so much.
Here are three things that investors shouldn’t overlook when investing for income.
This article isn’t personal advice. If you’re not sure an investment is right for you, ask for financial advice. Investments, and any income from them, will go up as well as down in value, so you could get back less than you put in. Yields are variable and no income, or return, is ever guaranteed. Past performance is not a guide to the future.
Dividends – it sounds obvious, but not all companies pay dividends and not all dividends are created equally
Investors should look for:
Commitment – a history of paying dividends year in, year out. A consistent record gives you some indication the company is serious about dividends.
Yield – not too high, not too low is a good rule of thumb. Very high yields can indicate a company is struggling or an unsustainable payout. Very low yields could suggest dividends aren’t a priority.
Growth – your expenses will rise over time. Inflation alone ensures things go up in price. If dividends can keep pace with, or beat, inflation, you won’t lose purchasing power of your money.
Balance – as with most things in life you want the best of both worlds. A blend of companies that pay a reasonable income now, and some that will help your income grow over the long term.
What is dividend yield? A company’s dividend yield is the percentage of its share price that it pays out annually in dividends. If the share price is 100p and it pays a 5p dividend, the dividend yield is 5%.
What makes a ‘good’ or ‘bad’ yield? A high yield might look attractive, but don’t chase high yields blindly. The high yield could be because of a low share price, which could be because a company is struggling. Or it could suggest an impending dividend cut, because the company can’t sustain its current dividend. Try to strike a balance between high-yield stocks and dividend growth stocks.
Diversification – this means not relying too heavily on too few things
You need to consider diversification from a couple of angles.
Companies – if you rely on one or two stocks and they get into difficulty, your whole investment strategy, and therefore your future financial stability, is in jeopardy.
Industries – target multiple companies in multiple industries. It spreads (but doesn’t eliminate) risk. Companies in typically stable industries, for example utilities and consumer staples, are less likely to cut dividends during downturns. Those in economically sensitive, or fast-growing industries, can offer dividend growth potential. Invest in a mix.
Countries – companies all over the world pay dividends and some of the best companies out there are based overseas. Why exclude them? It’s easier than ever to take advantage of a wide opportunity set and give yourself maximum diversification potential.
Investing in funds gives you an easy way to maximise how diversified your portfolio is.
A few high-quality equity income funds can give you a spread of dividend-paying investments across different companies, industries, and countries. Most aim to pay a regular income, either quarterly or semi-annually.
Investing in funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.
Our new Global Equity Income Fund brings together different fund managers in a single, highly-diversified solution. And it offers a monthly income.
Review – what’s right now won’t be right forever
It’s important to regularly monitor the performance of your shares and funds. Adjust your portfolio if necessarily.
Here are some top tips:
Look out for changes in company financial health, dividend payouts, or dividend policies.
Consider companies that offer dividend and share price growth potential. A company with a lower yield, but a strong history of increasing its stock price and dividends, might offer better long-term returns than one with a higher yield, but stagnant growth.
Harness the power of compounding. Take the dividends if you need them. If you don’t, reinvest them to earn even more dividends on the new shares or fund units you buy with it. This can significantly boost your long-term returns.
Accept that risk can be spread through diversification, but not eliminated. Currency movements can also affect the value of overseas investments.
New – HL Global Equity Income Fund
Our new fund aims to do all the above and more.
We’ve blended the strategies of who we believe are some of the best global equity income stock pickers in the market right now.
It’s globally diversified and invests all over the world, including higher-risk emerging markets. It aims to provide an income, dividend growth potential, and long-term capital growth.
For those who need the income, you can choose to receive this monthly, or you can re-invest it.
HL Income Fund
The HL Income Fund invests in a mix of bonds and shares.
The fund aims for growth over the long term, but also gives investors a monthly income.
The fund is an all-in-one, globally diversified portfolio managed by HL’s expert fund management team. This means you can hold it on its own and have a fully diversified investment portfolio. Or, you can add it to an existing portfolio.
This fund also invests in smaller companies which adds risk.
HL High Income Fund
The HL High Income Fund also invests in a mix of bonds and shares from across the world.
Investors can leave the asset allocation and fund manager selection to HL’s expert fund management team.
It’s a great option if you’re looking to diversify a portfolio that’s focused on generating an income. Investors can get a monthly income, along with the potential for future income growth.
This fund invests in smaller companies, high yield bonds and emerging markets, which all adds risk. Charges are taken from capital, which can increase income but reduce the potential for capital growth.
HL funds are managed by Hargreaves Lansdown Fund Managers Ltd., part of the Hargreaves Lansdown Group.