Dividend income holds potential for investors
Investing in dividend stocks does not necessarily mean capital growth has to be compromised, according to one portfolio manager.
Stephen Thornber, portfolio manager, Global Equity Income at Threadneedle Investments believes a dividend income-based strategy can offer investors a high yield and the potential for capital growth.
The advice comes even as Thornber expects the Reserve Bank of Australia to keep official rates on hold, keeping interest rates at historic lows.
He added that with the property market bouncing back, if global economies continue to improve, the RBA may even lift rates sometime next year.
Speaking on the effects on income-based strategies of better global economic data, Thornber said that focusing on dividend paying companies that are expanding can mean investors can participate fully in rising markets.
"Traditionally income strategies have been a defensive investment, but a new generation of funds have been successful in both protecting capital during market weakness, while keeping up with rising markets — as we have seen this year," he said.
He said the global equity income sector would continue to grow in the years ahead as the dividend culture gains momentum in world markets, and an ageing population continues to focus on yield.
"With the right stocks, investors should absolutely be able to expect strong and consistent income as well as capital growth as markets improve," he said.
Equity income investing is becoming more popular among retirees as they look to alternatives to bonds and term deposits, both of which are losing their sheen as inflation rises.
"Equity income provides a good hedge against inflation, which is particularly valuable in an environment of quantitative easing as we have seen in recent years," Thornber said.
He said investors can offset the volatility risk of owning equities by investing for the longer-term. This means the benefits of a rising stream of income can drive value creation.
"The right equities can deliver both yield and growth with manageable levels of risk," he said.
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