2020 is shaping up to be a difficult year for income-seekers, but advisers and wealth managers are finding myriad ways to protect investors’ income stream. Citywire reports.
Central banks have cut interest rates to close to zero – Britain’s to a historic low of 0.1% – and companies have gone into survival mode, shelving dividends to preserve cash and strengthen their balance sheets.
The UK stock market is particularly vulnerable due to its high payout ratio, large weightings to cyclical sectors and concentration of dividends in areas such as financials and energy.
Kevin Boscher, CIO at Ravenscroft, expects many dividend cuts to be reversed once the economy is on the road to recovery. ‘Extremely aggressive global policy easing together with a massive effort to find vaccines and treatments for the virus will eventually lead to a significant economic and market recovery over the coming months,’ he said.
So, what can income-seeking investors do in the current climate? We harvested six top tips from advisers and wealth managers:
1. TAP INTO REVENUE RESERVES
Tom Munro, director of Falkirk-based Tom Munro Financial Solutions, has always advised income-seeking clients have exposure to UK equities and believes the medium-term certainty of a post-coronavirus recovery outweighs the short-term downside risks.
For him, the answer to the current conundrum lies in exposure to investment trusts as a tactical tilt for those with immediate income needs.
‘During years of outperformance, trust managers build up surplus levels of income to keep back for lean years, giving the boards of investment trusts the ability to boost the dividend if required,’ he said.
For Boscher at Ravenscroft, diversification is the key to income investing. Its portfolios hold a mix of direct equities, open-ended funds and investment trusts, which in turn have well-diversified underlying holdings.
‘We take a balanced approach for our income-oriented investors, ensuring that portfolios have exposure to a diversified range of income-producing assets,’ Boscher said. ‘This strategy means that we look to invest in income-producing equities on a multi-cap basis, recognising the quality and value available in small-, mid- and large-cap stocks,’ he said.
3. FOCUS ON QUALITY
Decent dividends can still be found in ‘quality growth’ areas of the UK market, says Morgan at Charles Stanley, and in sectors where revenues are much less interrupted by economic uncertainty – healthcare, consumer staples and technology.
‘It is companies in these sectors that are most likely to survive, if not thrive, without additional help. We are, therefore, happy with our holdings in AstraZeneca, Reckitt Benckiser, Unilever and Moneysupermarket among others,’ he said.
4. GO FOR GROWTH
For Brewin Dolphin, the key for those seeking sustainable income is the resilience of the underlying business model and the company’s ability to generate cash and grow dividends.
‘Tobacco and pharmaceuticals tick these boxes as do utilities. Consumer staples and supermarkets should also prove strong businesses at difficult times,’ said investment manager Rob Burgeman.
‘The secret, as ever, with dividends is to find those companies that are growing their income steadily in line with the underlying business. These are the ones where you should see a growing income stream and some scope for capital appreciation.
‘Mature businesses with little growth that overdistribute income, and which have no scope for dividend increases, are very exposed to a turndown like this. With dividends, it is definitely better to travel than arrive.’
5. REMAIN BALANCED
Companies with strong balance sheets and good prospects deferring or cancelling their dividends challenge Canaccord Genuity’s attempts to blend a decent absolute level of income with stability.
However, deputy chief investment officer Richard Champion warns against losing sight of the longer-term picture. ‘We must avoid the trap of rebalancing our income portfolios only to companies that, even if they pay their dividends now, may grow them below the rate of inflation over time,’ he said.
‘So, we will continue to hold companies that have temporarily suspended dividend payments, where we feel they can offer superior growth in payments in the future.’
6. STAY INVESTED
Nexus Investment Managers, which runs portfolios for Hampshire-based Nexus Independent Financial Advisers, is encouraging clients to stay invested even with further dividend cuts on the horizon.
‘The income from equities is still higher than income derived from any other asset class,’ portfolio manager Lucy Kupczak said. She favours funds that cast their net beyond the FTSE 100 and companies with proven track records of dividend growth.
While waiting for dividends to recover, Malpas at Vermeer suggests those reliant on a steady income stream from their investments could temporarily use cash held on their accounts – an approach that worked well during the global financial crisis.