The Search For Yields: Dividend Paying Funds That Beat Inflation

With the rate of inflation still way above the best savings rates available, equity investors are looking for more than just the potential for higher stock prices, they want a steady stream of income.

Companies that pay a decent quarterly (or even monthly) dividend, especially those that have a history of increasing their payout over time, are now more attractive than those that don’t. Even Apple has finally realised that it needs to return some of its $98 billion in cash to the owners of the company (the shareholders).

Real interest rates are still negative

The latest official figures put Britain’s inflation rate at 3.4% for the CPI and 3.7% for the RPI. The trend for the time being is down but real interest rates are still deeply negative.

For example, the highest paying instant access savings account I can find right now is the Leeds Building Society Postal Access Account that pays 2.90% gross p.a., and that’s still 0.8% below the official rate of inflation (RPI). And let’s not forget that the official numbers are heavily manipulated.

Show me the money

In this environment investors are saying to companies ‘if you want my cash you had better show me the money’. In other words, I’m not going to invest in your business so that you can just sit on a huge pile of cash, I want a share of your profit.

Why I like dividends

Dividends are regular payments that companies make to their shareholders. These can be in the form of cash or additional shares of stock (It’s your choice). Companies that pay dividends are returning a portion of their profit to shareholders as a reward for holding the stock.

Investing in companies that have a history of paying dividends gives you peace of mind. A company’s willingness and ability to pay steady dividends over time – and its power to increase them – provide good clues about its fundamentals.

In short, dividends don’t lie. The company either has the cash to pay the dividend or it doesn’t.

“The only thing that gives me pleasure is to see my dividends coming in.” John D. Rockefeller.

Building an income portfolio

Investors looking to build their own dividend portfolio could look at popular names such as those I’ve listed below.

A Table Of Popular Dividend Paying Stocks

Dividend data from Google Finance.

*Johnson & Johnson has raised its annual dividend every year since 1964.

** McDonald’s has increased its dividend by 923% over the past decade.

 

Other dividend paying companies I like include:

  • Enerplus Corp, an ex-Canadian royalty trust that pays 9.54%
  • Gold Resource Corporation, a precious metals producer and explorer that pays 2.45%
  • Dorchester Minerals, a master limited partnership (MLP) that pays 7.04%

Those not able to spend the time constructing there own dividend income fund could instead look at investing in a managed fund such as those I’ve listed below.

BlackRock Global Income Fund

 

The BlackRock Global Income Fund currently yields 3.63% and has an annual management fee of 1.5%.

The fund holds large cap companies such as Pfizer, Johnson & Johnson, and Coca-Cola. It is also weighted towards consumer staples (28.6% of the fund), which is a good thing since consumers are cutting back on discretionary spending.

To find out more visit: http://www.blackrock.co.uk/intermediaries/prices-and-performance/fund-profiles?fundCode=E_GIFA

Threadneedle Global Equity Income Fund

Another fund I like the look of is the Threadneedle Global Equity Income Fund which currently yields 4.80% and also has an annual management fee of 1.5%.

Among its top 10 holdings the fund includes Vodafone, Swiss pharmaceutical company Roche Holdings, and BP Prudhoe Bay Royalty Trust which pays 7.52%.

For more information visit: http://www.threadneedle.co.uk/en/funds-and-prices/prices-data/oeics/retail-net/equities/global-equity-income-fund

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