Talking Point  

Quest for income drives prices up

 

Equity income has been attracting investors for many years but they need to be careful how much they are paying for yield, Nick Kirrage has told FTAdviser.

The co-head of Schroders global value equity team said: "Everyone is looking for income, aren't they? It seems to be the answer to every question in the investment industry: 'How do I get income? Where do I find it?'

"Equity income, of course, is a valid place to be looking for that. But when everyone wants the same thing, it tends to get expensive. This is an issue."

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He said that, while generating this income, people do not want to hurt their capital and overpay for the yield they are chasing.

Mr Kirrage added: "People now are asking: 'How do I get not just an attractive yield on day one, but growing income, while avoiding overpaying for popular parts of the market, which may have good income characteristics but might hurt my capital over time?'"

There has been a trend for companies to reinvest instead of hiking dividends, which has made the quest for income more difficult.

He said there had also been some areas of the market such as staples and mining where company management had started to prioritise reinvesting into the company instead of over-extending themselves by raising dividends.

Mr Kirrage said: "People are cautious. They are not keen to feed the rope out too far, by extending a high dividend today only to have to cut the yield further down the line, which could have an effect on share prices. But you can still find good dividends if you look closely."

So where should investors look for income - at home or abroad?

Mr Kirrage said: "There are pockets everywhere. For example, the overall dividend yield in the UK looks quite reasonable - approximately just below 4 per cent, which is quite close to the long-term average.

"But when you scratch the surface and look beneath, what is driving this is 20 or so companies with very high yields - banks and mining companies, for example - and the reason for these high dividends is that investors are questioning the sustainability of such company yields.

"At the other end, you have safer, popular companies with much lower yields. 

"Balancing these two extremes is like having your head in the oven and your feet in the freezer. Your body average temperature is fine but it is not actually an easy way to make money and find income.

"Therefore investors have to be careful about how they pick through those 20 or so companies and whether those yields look sustainable, and where among the smaller companies investors can find drivers for dividend growth."

According to the fund manager, this is a similar story in the US, Asia and Europe.