Whatever decision the Reserve Bank of Australia makes on Melbourne Cup Day, the fact remains that interest rates are at historic lows.
But the question, according to Stephen Thornber, global equity income portfolio manager at Threadneedle Investments, is whether income-seeking investors should consider moving out of dividend stocks in the interest of capital growth as global economies pick up.
"Worldwide economic indicators are definitely improving, and with the property market also showing signs of life, most analysts would be surprised to see the RBA cut rates," he said.
"In fact, if global economies continue to improve, at some point next year rates may even be lifted."
Thornber said that a dividend income-based strategy could offer investors both a high yield and the potential for capital growth.
"Investing in dividend stocks does not have to mean that the potential for capital growth is compromised," he said.
"In fact, the last two decades have shown that investing in companies which pay high dividends actually results in superior total returns.
"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."
And in a low growth world, Thornber said that companies were using dividends not only as a means of rewarding investors but also to demonstrate financial strength and attract new investors.
"A robust balance sheet means that a business can sustain rising dividend payments, weather potential economic storms and invest in profitable growth," he explained.
"(Indeed) the right equities can deliver both yield and growth with manageable levels of risk.
"With the right stocks, investors should absolutely be able to expect strong and consistent income as well as capital growth as markets improve."
Originally published by SMSF Essentials.
