Barnett: Why dividend growth beats yield

Mark Barnett, UK equity income manager at Invesco Perpetual, talks through his investment strategy and explains why dividend growth is more important than yield.

Barnett, dubbed the next Neil Woodford, manages the £53.8 million Invesco Perpetual Select UK Equity trust, £797.1 million Perpetual Income and Growth Investment Trust, the £229.8 million Keystone Investment Trust and the £289.9 million UK Strategic Income fund.

He believes equity income is a core investment strategy and should always form part of a private investor's portfolio.

Barnett explains: "Equity income is what I classify as a core investment universe because the delivery of income and growing income is always what you are looking for from an investment. Ultimately it is the growth in the income from any investment which delivers capital."

When it comes to finding income, he explains, if you look over long periods of time, 20, 30, 40 years in the UK market particularly, the best investments have been those companies which have grown their dividends the fastest over a long period of time.

The manager stresses dividend growth is important, more so than chasing yield.

He adds: "You can reinvest dividends and accumulate more units or more shares in the investment trust. But the fact is the successful companies are the ones that can grow dividends."

He points out the areas that generate the fastest dividend growth have changed over time. For example banks would have been a large part of income portfolios in the last five years, but this is no longer the case.

Barnett adds: "At the moment there is a decent level of income coming out of the market. You have to tread carefully as there are companies which will struggle to grow dividends as fast as we have seen in the last few years.

"Then there are companies which will clearly not be able to pay a dividend at all. That's my job to evaluate the pitfalls in looking across the market."

Tobacco has been a large part of the three investment trusts and the open ended fund Barnett manages, as well as consumer goods. He believes tobacco companies, many of which he has held in his various portfolios for many years, are the best example of well-run consumer goods companies in the market.

Barnett is bearish when it comes to holding financials. He stresses he does not hold any banks, mining companies or big oils.

He explains: "I think there are opportunities elsewhere in the market. My style is I don't need to hold anything because it happens to be a large part of the index. Banks, mining [and] oils are a large part of the index. I don't hold any of them because I am not managing a portfolio on an index-relative basis."

BT Group is the top holding across the three investment trusts and open-ended funds Barnett manages. Recently the telecoms giant's chief executive, Ian Livingston, announced his departure. Barnett stresses the exit will not change the amount of exposure he has to the company.

He says: "I am disappointed at his departure. However, I think the strategy will survive beyond him. Therefore, I am confident we will continue to deliver on growing the dividend and the business [BT] is well set for the next few years. I am not going to shift my stance substantially as a result."

Barnett is bullish on healthcare companies, particularly those in the UK and Switzerland. He explains the top companies are pharmaceuticals. He says the industry as a whole has undergone a process of quite substantial change in the last decade, partly driven by work done in the late 1990s and new medical discoveries.

In June the UK equity markets retreated sharply as US Federal Reserve chairman Ben Bernanke suggested an end to loose monetary policy.

Barnett explains the announcement did not substantially change his strategy and adds tapering is not an absence of quantitative easing (QE), it is just a lower level of QE, going down from around $80 billion to $60 billion (£52 billion to £39 billion).

He adds Bernanke wanted to remind the market low yields are not an everlasting feature of the economic landscape.

"He is concerned about some of the unforeseen consequences of holding down the Treasury bond yield for long periods of time. In other words people get used to low yields and therefore behaviour becomes accustomed to those low yields."

The fund manager concludes: "In the end yields will rise and you have to prepare for that. But clearly he doesn't want this to happen too quickly - the sustainability and the strength of the economic recovery is probably not strong enough. Bernanke was trying to give the markets a sense [of] what the market would be like if QE was scaled back."