This highlights the potential protection that a value and quality style tilt to an income portfolio may offer in a rising interest rate environment.
In terms of geographical tilts, a global income portfolio will tend to have a bias towards regions with high dividend pay-out ratios, as generally this translates into a higher dividend yield. Taking the MSCI equity indices as examples, in the UK the pay-out ratio is 77%, in Europe it is 63%, it is lower again in the US at 49% and MSCI Japan’s pay-out ratio is just 35%. The dividend yield itself is actually higher for the Japan index than the US, but the winner is the UK where the gross dividend yield for the index is a touch over 5%.
Understanding portfolio tilts
Of course, a high pay-out ratio inherently makes dividends less sustainable in a downturn without running down cash balances or taking on debt. Although the stigma of cutting dividends means companies will usually do their utmost to keep paying shareholders.
For example, as the oil price fell 75% between 2014 and 2016, the earnings of oil companies cratered. A wave of energy company defaults rocked the US high yield debt market but large UK listed oil companies Shell and BP weathered the storm, maintaining (and even slightly growing) their dividend payments.
All this means that a global income portfolio, especially one aimed at UK domestic investors, will likely have a sizeable UK equity allocation.
Investors need to understand the implications of the country, sector and factor tilts inherent within their investment style while also remembering not to overlook regions that seemingly do not quite meet their income requirements yet. These unloved regions may provide diversification benefits, as well as the potential to ramp up dividends in the future.
For further information on the Quilter Investors Monthly Income range, please click here
For Investment Professionals only. Past performance is not a guide to future performance and may not be repeated. Capital at risk.
This communication is issued by Quilter Investors Limited ("Quilter Investors"), Millennium Bridge House, 2 Lambeth Hill, London, England, EC4V 4AJ. Quilter Investors is registered in England and Wales (number: 04227837) and is authorised and regulated by the Financial Conduct Authority (FRN: 208543).
For further information and to access the KIID and prospectus for the Quilter Investors Monthly Income and Quilter Investors Monthly Income and Growth Portfolios, please visit the Quilter Investors website.
Any opinions expressed in this document are subject to change without notice and may differ or be contrary to opinions expressed by other business areas or companies within the same group as Quilter Investors as a result of using different assumptions and criteria.
Quilter Investors is not licensed or regulated by the Monetary Authority of Singapore (“MAS”) in Singapore. This document has not been reviewed by MAS.