Go international to find secure income streams
Finding secure sources of income has always been a difficult process. However, with the banking crisis of 2008 prompting many of the world’s central banks to slash interest rates to record lows it has become increasingly hard to capture reliable income streams. With many of the world’s higher-rated sovereign bonds now producing negative real yields, the issue has been further compounded for investors
For the less risk adverse investor, the equity markets have offered a way of helping to meet income requirements as they fall due. For many the fact that these investments come with additional volatility is accepted and outweighed by the risk premium they receive as compensation. Equity funds that focus primarily on providing a consistent or growing yield will naturally, on the whole, invest in the more defensive parts of the market. This is because it is the larger, more established, companies with less aggressive growth policies or opportunities that tend to provide the biggest pay outs.
However, this does not mean investors are insulated from equity market volatility, but more that these investments may provide better capital protection in a sell-off. They do, in fact, come with their own risks such as limited participation in a strong market rally or being overly exposed to a smaller set of companies. In the UK, for example, 50 per cent of all dividends come from only nine companies; if one of these suffers a mishap it could lead to an exaggerated impact on fund performance. There are a number of very good equity income funds currently operating in the UK, all of which provide investors with exposure to the higher yielding areas of the equity market.
Although many of the underlying UK companies in these funds do derive large parts of their revenue from overseas, a lot of investors choose to venture into the international equity markets directly to help diversify their income. Some of these regions are more widely accepted areas of income investing than others. However, there are a few regions which have recently started to become increasingly reliable at returning capital to shareholders, and as such are now considered by a wide range of income hungry investors.
The Asian (ex-Japan) equity markets are far more widely known for their growth characteristics than their income potential. However, in recent years many of the region’s companies have surprised investors by maintaining dividend payments in times of market stress. This is a reflection of the strong financial position of companies and countries in Asia and an increasing focus on shareholder returns. Having suffered their own financial crisis in 1997, Asian companies and governments went through a process of deleveraging then, similar to that which the west is struggling with now. More limited access to capital markets meant they became much more aware of the importance of both listening to, and rewarding, shareholders. As such, payout ratios on dividends are presently at around 40 per cent of earnings and were as high as 60 per cent in 2008-2009; though this was a function of maintaining, not increasing, dividend payments, as earnings fell. For a region known more for its capital growth qualities, the availability of an income stream may take some investors by surprise.