Advisers and investment managers are turning to infrastructure, investment trusts and bonds in their hunt for income as dividends have dried up to the tune of £32bn.
As the coronavirus crisis hit company balance sheets over the past three months, hundreds of firms have culled or slashed their dividend payouts to shareholders in an attempt to form a cash buffer against the economic impact of the pandemic.
With a substantial source of investors’ income chipped away — £31.8bn of all dividend payments have been cut according to AJ Bell — advisers and discretionary fund managers have been seeking yield elsewhere.
Where to look
Tom Sparke, investment manager at GDIM, said: “We have moved to a greater reliance on investment grade credit in portfolios as this is an asset class that is being supported by central banks and yields can be only slightly lower than those on UK equity.
“It is a lower risk asset class too, so should protect on the downside.”
Andrzej Pioch, multi-asset fund manager at LGIM, said his diversified exposure to bonds had helped his fund against the falling dividend payout.
He said: “Going into this correction, we were diversified across over 30 asset classes. We then added South Korean and New Zealand bonds to further diversify our bond exposure.
“That helped us cushion the impact when companies weighed the decision to cut or forgo their dividends to protect their businesses.”
Others saw infrastructure as a good bet for income seekers.
Charlie Parker, managing director of Albemarle Street Partners, said: “The crisis has shone a light on the limitations of portfolios that derive their income from the dividends of UK shares. The alternative is to bolster portfolios with assets such as infrastructure.”
Mr Sparke agreed, adding that infrastructure was less likely to reduce their pay-out as infrastructure projects were usually “strongly backed”.
LGIM’s Mr Pioch also held infrastructure as an alternative to equity income, but John Husselbee, head of multi-asset at Liontrust, pointed to higher levels of risk involved with such investments.
Mr Husselbee said: “[Equities cutting dividends] leaves income seekers with no obvious place to turn in the face of falling dividends, unless they are prepared to take on more risk.
“Other options, such as property or infrastructure, will tend to involve more risk or at least a different kind of risk.”
Investment trusts were also a popular pick to bolster income payments. During the dividend drought, long-running success stories of the investment trust world increased their dividend payouts even against the backdrop of falling dividends.
Laura Suter, personal finance analyst at AJ Bell, said: “While open-ended funds have to pay out all the income they receive each year, investment trusts are able to hold over 15 per cent of any income in order to boost income in leaner years.
“This means they are more able to smooth out income payouts and so may be able to supplement this year’s income from reserves.”
Ben Yearsley, investment consultant at Fairview Investing, is also keen on trusts, particularly those in the renewable energy sector. He noted, however, investors should not put their whole portfolio into such “nice areas”.
What does this mean for clients
Advisers remained confident that even clients reliant on ‘natural income’ from equities would survive the dividend drought as they would hold a cash buffer.
Darren Cooke, chartered financial planner at Red Circle Financial Planning, said: “Clients reliant on ‘natural income’ are likely to see that fall and will either have to dip into cash buffers — I would hope most advised clients have one — or revert to taking funds from capital.
“The perceived wisdom is that taking money out of your investments when they are down is not a good idea but you may have no choice. Any good adviser will have planned for just this sort of downturn in markets and the client's plan should be robust enough to withstand it.”
Financial services director at Dobson and Hodge, Paul Stocks, agreed. He said for clients who did rely on now non-existent dividends, it would be a matter of “tightening belts, using cash or selling down assets”.
Looking forward
Liontrust’s Mr Husselbee said the return to a healthier dividend picture depended on how society and the economy moved forward.
He added: “[It] would require a return to more normalised earnings and, to a large extent, that will depend on the nature of a business and how social distancing rules will impact its operations as lockdown eases.”
Mr Yearsley said, in general, income from dividends would be under “severe pressure” in 2020, adding this was “a year for not chasing yield”.
imogen.tew@ft.com
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