Stock Pros Share Income Investing Secrets

Stock Pros Share Income Investing Secrets

about 4 years ago2 mins

Only a handful of active stock funds beat their benchmarks nowadays. But the brains behind one of the few exceptions this week shared their secrets to “income investing” success… 💰

Only 12% of US stock funds beat the US market over the past decade
Only 12% of US stock funds beat the US market over the past decade

What does this mean?

Income investors focus on the regular dividends paid out by stocks, rather than uncertain share price growth. But the managers of the market-beating Guinness Atkinson Dividend Builder Fund counsel against simply seeking out high “dividend yield” – the annual profit-sharing of a company as a percentage of its share price – in favor of a different (and subtler) strategy.

They instead track down businesses with a history of consistently raising dividends – which may be more likely to do so in the future. One important clue is a high return on capital of more than 10% for each year over the past decade, demonstrating smart self-investment at a company. Moderate dividend yields, meanwhile, suggest room for sustainable growth – and relatively low debt means a firm is unlikely to have to cut back to pay the bills. Stocks that are cheap relative to their peers are also favored 👏

Beyond seeking out companies that look likely to grow their dividends over time, the Guinness Atkinson managers recommend concentrated bets: investing in 35 well-researched stocks, rather than 100, can help avoid bad apples. They also favor international diversification, with a roughly 50:50 US/overseas stock split, and long-term holdings: only a quarter of the fund’s investments change each year, and a third have been fixtures since 2012.

Some of the fund’s 35 holdings (Source: Guinness Atkinson)
Some of the fund’s 35 holdings (Source: Guinness Atkinson)

Why should I care?

For income-focused investors, the managers’ advice is simple: don’t look at the dividend itself, but the company paying it. And that approach has worked: over the past three years, they’ve beaten their global MSCI ACWI Index benchmark by an annualized 1.4 percentage points 😋

With recession fears rising in some parts of the world, the fund’s success is a reminder that focusing on key numbers – rather than simply following the crowd – can pay off for some investors.

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Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

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