Although income may have fallen out of favour over the past decade among investors chasing after the performance of fast-growing tech companies, there are signs that this may be changing.
For one thing, a number of large tech companies have begun prioritising shareholder distributions rather than just reinvesting income for growth as they mature.
In February, Meta announced that it would begin paying a dividend for the first time, pushing its share price up 20% in the process.
According to Morningstar, tech stocks have increased from 2.3% of the Morningstar US Dividend Growth index in 2003 to 18% at the end of last year.
There are also good reasons for seeking the protection of regular dividend payments during this current period of higher inflation.
Typically, companies that pay dividends are more mature and therefore have greater pricing power, meaning they are able to pass on higher costs to the end consumer.
However, tech stocks are still not widely held in most income strategies compared with dividend growth strategies.
The Morningstar Dividend Yield Focus index, which tracks stocks with attractive dividend yields and strong financial quality, is weighted 8% towards tech stocks.
Moreover, payouts among tech companies still tend to be small. Meta’s dividend is just $0.51 per share, which based on its current share price, represents an annual dividend yield of 0.42%.
For investors interested in capturing the gains from Big Tech, which many increasingly do after last year’s outperformance of the Magnificent Seven, there are naturally better alternatives to investing in income strategies.
Against this background, Darius McDermott, managing director at Chelsea Financial Services, chose the M&G Global Dividend fund and the Invesco Global Equity Income fund for this week’s head to head.
| M&G | Invesco | |
| Size | $2.54bn | $881.4m |
| Inception | 2008 | 2012 |
| Managers | Stuart Rhodes | Stephen Anness, Joe Dowling |
| Three-year cumulative return | 20.21% | 35.14% |
| Three-year annualised return | 5.49% | 9.77% |
| Three-year annualised alpha | 4.04 | 6.67 |
| Three-year annualised volatility | 16.24 | 16.48 |
| Three-year information ratio | 0.41 | 1.25 |
| FE Crown fund rating | **** | **** |
| OCF (retail share class) | 1.92% | 1.71% |
Investment approach
M&G Global Dividend invests in companies that are increasing their dividends, taking the view that dividends provide the best indication of a company’s capital discipline and its commitment to shareholders.
The fund manager, Stuart Rhodes, starts by screening around 15,000 funds to focus on dividend-paying companies with a market capitalisation of at least $1bn. That narrows down the number of available stocks to 4,000.
The final stage of the process involves choosing stocks based on three criteria for dividends. These are quality, meaning disciplined companies with reliable growth, assets, meaning asset-backed cyclical companies, and rapid growth, meaning structural growth driven by geography or product line.
Ultimately, the portfolio consists of around 40-50 stocks, with the weighting based on the conviction held in each investment. McDermott notes that the portfolio can be concentrated, with a large amount of the portfolio in the fund’s top 10 holdings.
The fund is unsurprisingly underweight US companies because of the paucity of dividends there. The fact the fund also targets dividend growers means it has a bias away from the mega-cap companies.
Meanwhile, the Invesco fund focuses on cash flows, dividend-paying companies and valuations. Given its focus on dividends, only one company, Microsoft, out of the Magnificent Seven, sits within its top 10 holdings.
The Invesco fund is also a high conviction portfolio, McDermott notes, with a particular focus on downside risk through a combination of research and analysis of accounting quality and balance sheets.
The Invesco fund has a slightly larger weighting to the mega-cap stocks compared with the M&G fund, while it is also underweight the US, much like the M&G fund. It has a large exposure relatively to the UK as well.
Country allocation:
| M&G | Invesco | ||
| USA | 44.4% | USA | 47.9% |
| Canada | 19.2% | UK | 19.9% |
| UK | 11% | France | 5.7% |
| Chile | 3.9% | Italy | 5.2% |
| Japan | 2.9% | Netherlands | 3.6% |
| Australia | 2.8% | Belgium | 3.3% |
| Finland | 2.8% | Hong Kong | 2.6% |
| Germany | 2.3% | Denmark | 2.5% |
| Other | 10.7% | Switzerland | 2.4% |
| Cash | 0.1% | Others | 5.5% |
Sector allocation:
| M&G | Invesco | ||
| Materials | 16.1% | Financials | 25.3% |
| Financials | 14.9% | Industrials | 19.4% |
| Information Technology | 14.6% | Information Technology | 15.2% |
| Consumer Staples | 13.6% | Consumer Staples | 10.1% |
| Healthcare | 11.6% | Healthcare | 7.9% |
| Energy | 9.3% | Consumer Discretionary | 7.4% |
| Consumer Discretionary | 9.2% | Communication Services | 5.1% |
| Industrials | 6.5% | Materials | 3.1% |
| Communication Services | 2.3% | Real Estate | 2.9% |
| Utilities | 1.9% | Energy | 2.4% |
| Cash | 0.1% |
Performance
McDermott notes that both funds use a bottom-up process, but the Invesco fund is also aware of the macro environment.
The M&G fund bounced back better than the Invesco fund during the pandemic, although the latter outstripped the former in 2021.
2023 was an especially strong year for Invesco, although McDermott notes that given the high conviction nature of both funds, they are higher risk than most of the other comparable funds.
“But both have demonstrated strong returns, indicating their processes work, with strong balance sheets and growing dividends at their heart,” he said.
McDermott also notes that both funds are on the expensive side with the M&G fund having an ongoing charge of 1.92% and the Invesco fund charging 1.71%.
Discrete calendar year performance
| Fund | YTD* | 2023 | 2022 | 2021 | 2020 |
| M&G | 9.3% | 8.39% | 4.64% | 14.2% | 10.39% |
| Invesco | 7.66% | 21.83% | -0.03% | 22.38% | 1.22% |
Manager review
Rhodes is a veteran having joined the M&G fund in 2004 as a global equity analyst. McDermott notes that he is able to leverage other resources within the group, notably the pan-European and UK dividend strategies as well as deputy managers.
Meanwhile, the Invesco fund is managed by Stephen Anness and Joe Dowling. Anness started his career within the UK equities team in 2002 as a trainee analyst and took on oversight of his first UK fund in 2008. He moved to the global equities team four years later. He took over responsibility for the global equity income strategy in 2019.
Meanwhile, Dowling is also homegrown having joined Invesco as a graduate in 2013. He started as an analyst in the global equities team before being appointed deputy fund manager in 2018 and fund manager in 2022.
Conclusion
McDermott notes that both funds share a number of similarities.
“There are a lot of similarities between these two funds – both are high-conviction funds willing to invest outside the traditional names you find in most global equity income funds. But both have delivered in terms of capital returns and are considerations as core global equity income strategies,” he said.
Overall, he leans slightly towards the M&G fund, citing Rhodes’ investment approach, which has been tried and tested through a variety of market conditions over the past 15 years.
