Can UK dividends balance out gilts?
Investors looking for income in today’s markets are facing a limited number of options on where to put their money.
Fixed income – particularly government bonds – is looking less attractive by the day. Yields have crawled lower as a result of near-zero interest rates and pessimism on the economy. Fallout from the eurozone debt crisis has also dragged capital values down in some areas.
With 10-year UK gilt yields at 1.77 per cent and US treasuries at 1.63 per cent, unless investors want to take a risk with the high-yielding peripheral European countries of Greece, Ireland, Italy, Portugal and Spain, there appears little value or income from this route.
For investors in cash or money market funds, interest rates do not show much sign of rising. Earlier this month the European Central Bank made the predicted decision to cut rates to a new low of 0.75 per cent, while on the same day the Bank of England announced an increase in its quantitative easing programme of asset purchases by £50bn to £375bn.
The US is no different. The IMF recently described the recovery of the world’s largest economy as “tepid and subject to elevated downside risks, in light of financial strains in the euro area and uncertainty over domestic fiscal plans”.
The equity dilemma
It is little wonder that investors are turning to UK equities as a source of income. UK Equity Income was the fifth highest selling IMA sector in May, with £99m of net retail sales, nearly double its monthly average of £59m for the previous 12 months.
This brings the sector’s total funds under management to £54.17bn, making it the fourth largest IMA sector behind UK All Companies, Absolute Return (offshore) and Unclassified.
The dividends investors receive from UK equities are also improving, according to Capita Registrars. Capita data states that total dividends paid to retail shareholders in the first quarter reached £2.14bn, approximately 22 per cent higher than the same period in 2011. It attributes this to ‘generous payments’ from some of the largest companies such as Vodafone, which paid a special second interim dividend of 4p per share in February and in May announced a final dividend of 6.47p to reach a total dividend per share for the year of 13.52p, an increase of 51.9 per cent from 2011.
Following the strong start to the year for dividends, Capita Registrars has upgraded its forecast for the year as a whole and now expects investors to receive £8.7bn in income from shares, an increase of £658m from 2011, and surpassing the previous peak of £8.41bn of dividends paid in 2008.
As well as raising the income from UK Equity Income funds, these bumper first quarter dividends have helped boost their total returns. The average fund in the sector returned 6.08 per cent from the start of 2012 to July 3, compared with 4.77 per cent from the Sterling Corporate Bond sector and 1.53 per cent from the UK Gilt sector, according to FE Analytics.