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Written by: Juliet Schooling Latter
05/05/2022
Doing the marshmallow test with your kids is fascinating – watching the play of emotions across their faces, and how they wriggle in an effort not to reach out and scoop up the sweet treats on offer.

For those of you unfamiliar with it, the marshmallow test was first devised over 50 years ago by Walter Mischel at Stanford University. It was part of a series of studies on delayed gratification.

The idea of the experiment is to put a marshmallow in front of young children and tell them they can have a second one if they can go 15 minutes without eating the first. You then leave the room and observe what they do. Are they patient enough to double their reward? Or do they want a lesser reward straight away?

Being patient with your investments

You can think about the income on investments in the same way. Do you want a high income today or a growing income for the future? Or do you need a little bit of both?

Either way, as the sudden jump in inflation has taught us recently, it’s useful if your income can grow.

When it comes to investments there are several ways you can get an income. For example, it could from the interest on a cash savings account, the interest paid on a bond, the rent from a property or the dividends of a company.

And it’s this last area – dividends – that I’ll focus on today. Dividends are sums of money paid by companies out of their profits or reserves. The amounts are decided by the board of directors and approved by the shareholders.

Some companies will pay a very high dividend. Others will pay a lower dividend but will focus on increasing their pay outs each year.

High dividends can be attractive, but sometimes they are so high that the company’s ability to sustain such high payments can be called into question. And if they are giving all the money back to shareholders, they are not reinvesting in their business and looking to grow in the future.

So, while a more modest dividend might not look so appealing today, it could be a better investment in the longer-term.

Funds that look for future dividend growth

Here are five equity income funds that invest in companies that can grow their dividends over time.

Guinness Asian Equity Income

Guinness Asian Equity Income fund invests in companies across the whole Asia Pacific region, including Australia. The portfolio is concentrated in just 36 equally weighted stocks, and has a one-in, one-out policy, looking for a combination of capital and dividend growth.

The managers look for specific characteristics and take the unusual step of not analysing dividend potential until the final stage of their process – at which point they focus on companies that can sustainably grow their dividend into the future. The fund’s historic distribution yield at the end of March was 3.9%.

BlackRock Continental European Income

The manager of BlackRock Continental European Income looks to identify undervalued European companies that offer reliable, sustainable dividends; potential dividend growth; and protection against inflation, with a lower level of risk. The mandate is flexible regarding company size and country exposure. The manager will actively manage the portfolio to find a balance of companies with large, but secure dividends, and those able to grow dividends faster than the average company.  The fund’s yield is currently 3.1%.

M&G Global Dividend

This fund provides an opportunity to diversify income streams by investing globally in firms that provide stable and rising dividends. To achieve this goal, the manager splits the sources of his dividends into three categories. The first is quality, disciplined companies with reliable growth, the second is cyclical companies with a strong asset base and the third comprises those experiencing rapid growth from either a product or geographic area. The historic yield of the fund is 1.97%.

Baillie Gifford Japanese Income Growth

Launched in July 2016, Baillie Gifford Japanese Income Growth taps into the exciting change in dividend attitudes in Japan: a new corporate governance code, coupled with a large cash pile on Japanese balance sheets is a big opportunity for investors. While the headline yield figures may be low by Western standards, there is certainly plenty of room for growth. Analysis will focus on financial strength and a management willingness to grow the dividend. The fund’s historic yield at the end of March was 2%.

IFSL Marlborough Multi Cap Income

This fund invests in UK companies of all sizes and aims to combine fast and sustainable dividend growth with capital appreciation. The fund uses a blend of ‘value’ and ‘growth’ holdings to meet its yield objective and offers something radically different from the majority of large-cap FTSE 100 income funds. The power of compounding growth in dividends, especially in the small and mid-cap sector (to which this fund has a bias), offers an attractive combination of growth and income. The fund’s historic yield at the start of March was 4.3%.

Juliet Schooling Latter is research director at FundCalibre

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