Capital at risk: All financial investments involve an element of risk. Therefore, the value of your investment and any income from it will vary and your initial investment amount cannot be guaranteed.
As much of the developed world looks forward to longer life expectancy (The Lancet, February 2017) we need to find ways to finance an extended retirement.
We anticipate that the ageing populations in the US, Europe and Japan will prioritise income in their investment portfolios. Yet just as investors need additional sources of potential income, traditional avenues are becoming less attractive or easy to find.
Faced with the 2007-08 financial crisis, central banks in much of the developed world were forced to intervene and stimulate growth, keeping interest rates at historic lows for much of the past decade. This created challenges for the fixed-income investor who used to see government bonds as a consistent source of potential income.
However, an alternative source can potentially be found in the US stock markets; more specifically, in companies that pay regular dividends to shareholders. We believe that companies responding positively to disruptive technologies – and upsetting traditional business models in the process – may prove significant as dividend payers.
Please remember that capital growth values may fluctuate and the level of income may vary from time and is not guaranteed.
Dividends for income
Traditional fixed income investors are not able to benefit from long-term growth since the yield they receive is, by definition, fixed. However, investing in shares that potentially deliver consistent dividend growth, as well as regular dividend payments, can offer investors the opportunity for long-term capital growth.
A look at the S&P 500 from 1940 to the end of 2017 reveals that dividend reinvestment and the effects of compounding (receiving interest on your interest) have accounted for more than 40% of the index’s returns (Morningstar. Data from 1/1/1940 to 31/12/2017).
Please note there is no guarantee that any forecasts made will come to pass.
Furthermore, there are certain sectors we believe are likely to have the potential to deliver income for investors, thanks to technological disruption.
First is technology. Many innovative start-ups offer new and exciting technologies, but well-established IT companies are also benefiting as organisations look to upgrade their systems and processes.
We’re also finding that an increasing number of technology firms focused on software, networking and hardware use cash to pay dividends, contrary to the notion that IT firms can add value to investors only via their growth potential. We believe this trend will continue, as shareholders are increasingly willing to reward mature IT companies’ management teams for dividend payments.
Improvements in life expectancy may have created challenges, but they have also created opportunities for the healthcare sector. Older populations tend to require more healthcare than younger populations (Nuffield Trust, February 2016) and healthcare spending in the US is predicted to climb 5.5% on average every year between 2017 to 2026 (Reuters, February 2018). Companies that can participate in this trend, while also improving their efficiency to counter rising costs, may be poised to benefit.
Healthcare innovators should also thrive in today’s markets. The US government’s Food and Drug Administration is approving more drugs and at a faster pace than before (FDA, December 2017), so pharmaceutical manufacturers that can deliver new products ultimately stand to reap the rewards.
Please note there is no guarantee that any forecasts made will come to pass.
Interest rate boost for banks
Banks are another sector of interest, although this has less to do with the increase in disruption and more to do with changing economic cycles.
Interest rates in the US are creeping back up; in March 2018 the Federal Reserve raised the target range by a quarter point to between 1.5% and 1.75% (Trading Economics, March 2018).
We believe that banks are well placed to benefit from rising short-term US interest rates. They take deposits from savers in exchange for interest payments and then lend to borrowers at a higher rate. Such a business model should translate to more profits as interest rates rise and acts as a suitable hedge against inflation for income investors. At the same time, some of the US’s big banks have high levels of capital on their balance sheets which insulates them well against any market shocks.
In summary, disruptive technologies are having a real impact on our lives and not just in the way we buy groceries or order a taxi. There is also an opportunity to share in the successes of companies growing their business in disruptive markets. As such, investors looking for long-term income and growth may benefit from reviewing their portfolio and considering the impact that investing for dividends might have.
For more information on this Trust and how to access the opportunities presented by disruption, please visit https://www.blackrock.com/uk/individual/products/investment-trusts/our-range/blackrock-north-american-income-investment-trust/trust-information.
The opinions expressed are as of April 2018 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative. There is no guarantee that any forecasts made will come to pass.
Please note you may not get back the amount originally invested. Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust specific risks: Overseas investment will be affected by movements in currency exchange rates. Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall. The Trust may use derivatives to aim to generate more income. This may reduce the potential for capital growth. Investors in this Trust should understand that capital growth is not a priority and values may fluctuate and the level of income may vary from time to time and is not guaranteed. The Trust uses derivatives as part of its investment strategy. Compared to a fund which only invests in traditional instruments such as stocks and bonds, derivatives are potentially subject to a higher level of risk.
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