Now is the time for British investors to look beyond the UK for dividend-paying companies as concerns mount about whether the recent benefits seen in the market could unwind, an investment insider has warned.
Speaking during a Defaqto conference today (23 May), Sheldon MacDonald, deputy chief investment officer at fund manager Architas, warned about the sustainability of UK dividends.
He said British investors tend to rely on dividends from UK companies because of the familiarity and good performance of UK income funds over recent years.
"It's nice and safe and easy," he said, also pointing to fears about the health of corporate governance regimes beyond the UK borders.
But Mr MacDonald warned this home bias comes with market risk, which is currently piling up in the UK as it extricates itself from the European Union.
Two thirds of FTSE 100 company returns are earned offshore, and these firms have been benefiting from the weakness of sterling against the dollar.
But the deputy investment boss questioned whether a rise in the pound could unwind all of the benefits these UK companies have seen so far.
He pointed out that five companies in the FTSE 100 index pay out a third of the entire bulk of dividends, adding: "If these firms start cutting their dividends then it really starts to shrink the net quite considerably; it just takes a few things to go wrong."
Mr MacDonald also pointed out that the UK houses a tiny fraction of all the income opportunities in the world.
He said the US increasingly looks attractive from a dividend perspective, despite the country's share buyback culture.
"One of Donald Trump's future plans is to tax all the cash sitting offshore, so we'll see some repatriation of that cash.
"Once that cash comes back onshore, companies will start paying out dividends and we will see more of a dividend culture in the US."
He also said Europe is looking strong from a growth perspective, having benefited from the reflationary trade more than anywhere else.
Meanwhile, he said Japan looks "decent and steady", adding: "There is nothing really to fear from Japan, and it has a culture of shareholder friendliness as companies realise the attraction of paying dividends."
