Four alternatives to UK equity income
Low interest rates have been a particular worry for those either at, or approaching, retirement for more than a decade now. A significant and growing part of the UK population, improvements in healthcare and lifestyle mean people are living longer. According to the Office for National Statistics, by 2050, one in four people in the UK will be aged 65 years or over. Making sure you have a reliable income to last the rest of your life has never been more important or more challenging.
UK equity income funds have often been the first port of call for investors when they begin their search. It’s the logical move given they specifically target the types of companies which pass on income to investors.
But investing purely in the UK also carries some risk, because just a handful of companies pay a significant amount of total UK dividends. For example, figures from consultancy Link Asset Services show 31% of all dividends came from just five companies in the third quarter of 2019 and the top 15 paying companies account for 57% of dividends. So when a company like Vodafone cuts its payment like it did this year, it can create a hole in your income stream.
With this in mind, here are a few alternative long-term income solutions to help diversify your returns.
Global equity income
As the name suggests, the benefit of global equity income funds is that they allow fund managers the flexibility to allocate to different regions across the globe when searching for dividend paying companies. A good example of this is the Artemis Global Income fund, managed by Jacob de Tusch-Lec, which has a slightly atypical approach to identifying stocks – namely by avoiding large companies, which means he can offer a different and growing income stream. The fund currently has 39.7% in European equities, 36.8% in US equities, 12.7% in emerging market equities and just 5.6% in the UK. It currently pays a yield of 3.25%.
These funds have grown in popularity in the past decade, as they give managers the flexibility to diversify their bond holdings across a range of sectors (such as government, corporate and high yield bonds), allowing them to shift allocations as they see fit. The Baillie Gifford Strategic Bond fund, managed by Torcail Stewart and Lesley Dunn, gives investors access to a concentrated portfolio of around 60-80 holdings primarily from both the investment grade and high yield segments of the market. The fund currently has an underlying yield of 3.6%.
Another alternative asset class to consider is property. Property funds can garner valuable returns, courtesy of rent from tenants, as well as the opportunity for capital growth if property prices increase. One to consider is the Janus Henderson UK Property fund. This fund invests in commercial physical property. It has a strong emphasis on providing a sustainable historic yield (currently 3%) by finding high quality tenants and securing long leases. The portfolio currently has its largest allocation to industrial properties (22.2%).
Infrastructure has become an increasingly popular asset class within a diversified portfolio in the past decade, particularly as pension and insurance funds have started to allocate to the sector. One fund worth considering in this market is First State Global Listed Infrastructure, which invests in the shares of companies involved in infrastructure around the world, including the likes of utilities, highways & railways, airport services and marine ports. Managers Peter Meany and Andrew Greenup are conservative investors and tend to build portfolios of around 40 holdings – specifically targeting firms with pricing power and high barriers to entry. The fund has a yield of 2.7%.
Darius McDermott is managing director of Chelsea Financial Services and FundCalibre