Building a defensive income stream

This article is part of
Guide to defensive multi-asset investing

"They have the cash for dividends. One of the problems investors will face is that some of the more high yielding companies are the more economically cyclical ones, the ones that may need cash from the government.”

Data compiled by fund house Octopus shows that UK equity income funds are over-reliant on a small number of stocks to provide income. 

Mr Jackson says the current climate means investors need to focus more on the risk of a dividend not being paid, than simply on the size of the payout.

To combat this, he says the income fund on which he works holds a very large number of different companies in the portfolios.  

Mr Morris says the situation is so stark that “dividends may not be something that we can think about this year, they may be over.” 

Alternative sources of income

Mike Coop is responsible for the income portfolios at Morningstar. 

He says the traditional areas of safer income for investors include real estate investment trusts (Reits), and infrastructure assets such as toll roads. 

Mr Coop says a problem with these assets right now is that “landlords are being asked to take a share of the pain” in terms of the economic downturn, with tenants unable to make rental payments.

Mr Flood is looking to assets that have many of the characteristics of bonds but a higher yield.

He invests in renewable energy and infrastructure assets, as the cash to pay the income on these ultimately comes from the government via subsidy, so has an element of security, and has a higher yield than the bonds offered by the same governments.

He says another advantage of those assets is that the rate of return is inflation-linked, so offers a protection that bonds do not. 

Mr Watson is also keen on these assets, describing them as a “real diversifier of income.”

Ian Reese, a multi-asset fund of funds manager at Premier Miton Investors says: “All too often, ‘reaching for yield’ involves taking a higher level of risk than is warranted and is most vulnerable to future cuts to income when they run into road bumps.

"For our equity selections, we favour managers who run a disciplined income approach.

"That is, managers who invest in companies that can either sustain or grow their dividends over time so as to provide an income outcome for their investors.

"It is no surprise to us that one of the longest serving managers in the UK is Colin Morton of Franklin Investors.

"He has been at the helm of his UK Equity Income fund for 25 years and is one of the most consistent performers amongst his peers by an approach that deliberately seeks to grow the income being generated by the portfolio over time.