Uncertainty around dividends has made it more important than ever for advisers to have income conversations with their clients, an expert has said.
Vanessa Eve, investment manager at Quilter Cheviot, said one of the starting points in that conversation was to assess the levels of risk that clients are willing to take, and what income level they realistically need to have.
“For example, [you could invest in] the safety of government bonds, which will pay you a regular income stream, but you will be overpaying for them.”
She added: “Over the long term with inflation being stickier, there could potentially be an issue [when holding government bonds] in terms of keeping up with inflation levels.
“So I think having that conversation around risk will be really important in terms of being able to achieve what clients are looking for.”
Speaking at Quilter Cheviot’s 'Income – The Great Dividend Reset' on Tuesday (September 7), Eve added the recent increase in dividend tax also made it important for advisers to ensure investments are placed in the correct wrappers.
The government is preparing to introduce a dividend tax of 1.25 per cent to fund its social care reforms, but this will not include pensions or Isas.
“If that dividend is received into an Isa, then there is potential for actually capitalising on solid dividends moving forward without necessarily having the consequential tax issues,” Eve said.
However Chris Beckett, head of equity research at Quilter Cheviot, said dividends in general were not an entirely reliable income stream.
“The only income you can truly rely on is those coming from government bonds, and even there you can’t rely on purchasing power of that income stream - inflation can eat away at it,” he said.
“Nobody predicted the pandemic and we are going to face in the future unpredicted economic circumstances that affect some sectors more than others.
“Ultimately, equities are a risky asset class and the income that they generate is risky but it does give you more income and the potential for capital growth so it fits with other parts of a portfolio.”
Some two thirds of companies cut or cancelled their dividends in 2020 to preserve cash as the pandemic hit.
According to Link, investor payouts in 2020 stood at £61.9bn, a 44 per cent drop on the 2019 figure and the lowest annual total since 2011.
While some firms voluntarily reduced their dividends, others were forced to hold back on payouts to shareholders. The Bank of England strongly suggested banks and insurers suspend their dividends while the government mandated any firm using a support scheme should not be paying out funds to shareholders.
But payments have rebounded quickly, with UK dividends jumping 51 per cent in the three months to June this year, as businesses began to reinstate payments to shareholders.