What next for equity income?

"Dividends are set by companies and reflect the portion of a company’s profits that are being distributed to shareholders. In addition to the attractiveness of dividend growth in the broad index, we also see that stocks with high dividend growth outperform other dividend-paying stocks in terms of total return.” 

This year has been tough, the sort of long-term growers of income and capital that we like have been mostly out of favour, while the more cyclical type of stocks have done well.Gabrielle Boyle, Troy Asset Management

One of the managers whose investment process has suffered during the market rotation of 2022 is Gabrielle Boyle, a fund manager at Troy Asset Management. 

She told FTAdviser Vantage Point: “This year has been tough, the sort of long-term growers of income and capital that we like have been mostly out of favour, while the more cyclical type of stocks have done well.”

The 'long-term growers' to which Boyle refers have generally been out of favour with investors this year as a result of bond yields rising. This is because the durable income to which Boyle is referring is viewed by market participants as relatively less attractive when bond yields are high. 

Boyle takes the view that equity markets do not typically ever fully discount the negative impact of a recession, so the prudent course of action, right now, is to own the equities with defensive characteristics.

Because bond yields typically fall when the economic outlook darkens, the equities that did well earlier this year on the basis of high yields will, in her view, perform poorly as yields collapse.

Ian Brady, chief investment officer at WH Ireland, takes the opposite view. He says the low bond yields that prevailed in the decade after the financial crisis, and boosted the returns of many growth stocks, were unusual relative to history, and higher bond yields will now be a feature of the market.

Brady says “I think we are past peak quantitative easing. Over time, history shows that buying companies with rising yields is a great way to dampen overall volatility in a portfolio. Right now we have some astounding yields in the market, there are many companies where the yields are higher than the price to earnings ratio.” 

Chris Murphy, who runs the Equity Income fund at Aviva Investors, says: “Investors need to realise that the decade after the global financial crisis was a specific era, and certain stocks and strategies performed well then, but we are in a different era now.