There is big divergence across markets
There are also major differences across sectors and companies. Some of the oil majors are well known dividend stalwarts, and they are under significant pressure from low oil prices. Meanwhile, some sectors will be able to maintain pricing power and could even increase revenues, such as gaming and tech companies. Key determinants of a company’s ability to maintain dividends include the percentage of fixed versus variable costs, the flexibility in operational costs and balance sheet leverage. Knowing corporate management is very important as some dividend policies are more conservative than others.
In this environment, we would also highlight that caution is required in taking a passive approach to equity income investing, as this can inadvertently lead to relying too heavily on the traditional income-generating sectors like oil producers. These sectors often feature in the top exposures among income-orientated ETFs, for example. A passive approach can also come with other issues. A rules-based approach to passive management often only alters positions once a dividend payment has been missed and foregoes the benefit of reacting to announcements on dividend cuts. An active approach to income investing will potentially never be more valuable.
Another strategy that features in the Income range is an enhanced income approach, which makes use of call overwriting. This approach gives up some upside potential to returns to deliver higher distributions. But the potential upside from today’s valuations may still offer a decent return for these strategies, while their often more diversified sector mix avoids the pitfalls of a passive approach.
In this challenging environment, a multi asset approach to income investing can incorporate all of these many considerations into portfolio positioning. We believe our income-focused strategies are positioned well to deliver on our objectives through our ability to allocate dynamically across the full spectrum of income paying assets.
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