In this 'Essentials' video, Andrew Jones provides an overview of the Global Equity Income Strategy that he co-manages with Ben Lofthouse. The strategy is designed to offer a blend of capital and income growth from dividend-paying companies over the long term, and may be suitable for investors looking for a diversified portfolio spread across countries and sectors.
*The portfolio typically holds around 70 stocks diversified by both sector and geography with the aim of maximising returns while minimising risk to both income and capital.
Cash flow coverage - indicates how well a company's financial obligations are covered by its operating cash flow.
Dividend coverage - Reflects how well a company's dividends are covered by its net profits. When a company's dividend cover is low it may be forced to cut future dividends if its profits fall.
Free cash flow (FCF) - Cash available after the deduction of capital expenditure, which can be used to pay dividends. Growing FCF can lead to dividend growth.
Payout ratios - The percentage of corporate earnings that are paid as dividends and can be an indicator as to whether a company has the scope to maintain or increase dividends. The team typically avoid companies with high payout ratios because this leaves the potential for dividend cuts if the business is struggling to grow its earnings.
Value traps - Some high-yielding equities can be more risky than their lower-yielding counterparts, particularly after a period of strong market performance when equity price rises push dividend yields down (yield has an inverse relationship to price). The high-yielding companies that are left are often structurally-challenged businesses or companies with high payout ratios (distributing a high percentage of their earnings as dividends) that may not be sustainable. These companies are often known as 'value traps'.