28/07/10

By Andrew Holt

Newton is encouraging charities to see the long-term benefits of investing in equity income in a recent paper entitled The case for equity income investing.

With authorities around the world seeking to repair defective credit markets and to support economies in the aftermath of the global credit crisis, the rates of income payable on most asset classes have changed significantly, observes Newton.

Most obviously, interest rates and the levels of income payable on government bonds have fallen precipitously.

Near-term changes in asset prices are uncertain, but Newton recognises the long-term attractions of harnessing income from investing in equities.

The paper highlights the attractiveness of equity income for long-term investors, drawing the reader's attention to the benefits of income-focused investing as a potentially highly effective way not simply of seeking to achieve a growing level of income but also of accumulating capital.

Dividends can offer investors some downside protection in bear markets, since they historically remain more stable than companies’ earnings.

The maintenance of a rigorous yield discipline may also serve to accelerate investors’ returns when markets recover by leading investors to buy shares inexpensively during depressed periods in markets.

It is often suggested that, by following an income-focused strategy, investors are likely to suffer by investing in businesses that have low, or no, growth potential, since paying a dividend is evidence of the paucity of a company's investment opportunities.

Newton argues that this belief is flawed. It refers to the now-famous study of US equities by Arnott and Asness, which demonstrates a positive correlation between a company's dividend pay-out ratio and its subsequent earnings growth.

Helena Morrissey, chief executive officer at Newton, said: "Studies such as this suggest that the payment of dividends actually encourages greater capital discipline which, in turn, leads to better long-term returns.

"A dividend is evidence of a firm's profitability and represents a commitment by the management of a company to return the cash flow it generates to shareholders on a regular basis."

Morrissey noted that by investing over the long term in income-generating equities, Newton believes charities could enjoy real growth in income together with long-term capital growth.

"Newton recognises the attractions of companies that pay above-average dividends through its range of equity income strategies. By being allied to a robust global thematic investment process, the investment team is able to focus on continuing to try to deliver a steadily growing level of income distributions for new and existing clients despite challenging market conditions.”