Investors with income as a priority face the dilemma that targeting a very high level of yield potentially means sacrificing some of the capital upside, according to Martin Connaghan.
The co-manager of Murray International, a £1.8bn global equity income investment trust that has increased its dividend for each of the past twenty years, said: “The first question we ask ourselves is: what level of yield or income are we targeting?
“The second is: to what extent are we looking for capital growth alongside this income, if at all?
“The higher the target yield, the more it will have a direct impact on what is realistically achievable on the second.”
He said that a yield of, for example, 6 per cent could be achieved in the current climate by owning a collection of telecom, financial, utility, energy and mining stocks, with some healthcare and consumer staples, but the issue was it would “struggle to keep pace with the wider market.”
This was particularly true as it would inevitably have little exposure to technology stocks, he added.
Connaghan said a yield of 4-4.5 per cent was more realistic as it meant the portfolio could own stocks in a far broader range of sectors, including stocks which have little yield, but a greater capacity to deliver capital return.
He said he tries to divide his portfolio into three buckets, with 70 per cent of the capital invested in stocks that have a yield roughly in line with the target range of 4-4.5 per cent, with the remaining 30 per cent in stocks that have little yield and some which have a much higher yield in order to balance out the low yielders.
The fund manager said the 70 per cent of the portfolio allocated to stocks around the target yield level included: “Consumer staples, industrials, healthcare, banks, insurance, oil & gas, and mining stocks in this area.
“We then aim to have a reasonable exposure (perhaps 15 per cent) to lower-yielding regions of the market, such as technology, additional industrials, and diversified financials (e.g. exchanges) to capture growth and beta.
“To balance this, we would allocate a similar proportion to higher-yielding sectors like utilities and telecommunications to recover the yield sacrificed.”
He added those ratios could vary depending on the level of yield available in the market at any particular time.
*The author of this article is personally invested in the Murray International investment trust
