BLOG: The hunt for income
We are all living through a time in which credit is less available, economic growth is low and fragile, global financial markets remain unpredictable, and the price movements of many financial assets, such as shares (equities) and bonds continue to be driven largely by central banks’ policies and changes in economic growth. We believe that in such an environment central banks such as the European Central Bank or the Bank of England will keep their key interest rates low for some time.
As a result of this many investments which used to provide income are no longer delivering the same results, which may mean that income from bonds could remain low as well. That in turn continues to present a challenge for many investors.
Investors’ appetite for income is being fuelled by both supply and demand. We have seen a gradual increase in demand for investments that can generate income because of a long-term demographic shift. Put simply, there are many more of us in retirement and we need more income to help fund it.
That demand has fed through to the government bond markets. As central banks have had low interest rates, we have seen the yield (income) on many bonds falling in line and also, as typically happens, the price of those bonds has risen as interest rates have fallen. This has left many investors fighting to maintain the level of income they were accustomed to in their portfolios, so much so that in recent times we have witnessed a rare occurrence of some companies’ dividends: the income payment to shareholders has exceeded the interest earned on government bonds. In other words, in some cases certain equities now have a higher yield than many government bonds.
What this means for investors is that equities can now supply a more attractive level of income, with the added benefit of potential growth over time. It is important, however, to remember that the value of investments and the income from them can fall as well as rise and is not guaranteed. Moving out of cash and government bonds in search of higher returns involves accepting a greater risk to both income and capital. Therefore, investing in this asset class should be approached with caution as, like any investment, you may not get back the amount originally invested.
If history is anything to go by, low growth environments like the current one tend to last for many years. We also expect that most companies would find it difficult to grow their profits in such an environment. Yet those quality businesses that have maintained their product prices and expanded their presence across different markets and territories have typically had the ability to deliver sustainable growth even when economic conditions were relatively weak (though we remind investors that past performance is not a guide of the future).
Given the economic uncertainty of the past few years, companies have been cautious in the way they have spent their money on new projects and, as a result, many are sitting on piles of cash. In the meantime, dividend pay outs have also been lower than they were in the pre-crisis years. We believe that both of these factors point to a positive outlook for investors looking for income through equities.
Stuart Reeve manages the BlackRock Global Equity Income fund