BLOG: Four funds to navigate the dividend storm
I recently read that the Oxford English Dictionary has added 13 new updates, all courtesy of the coronavirus. Among them are the likes of Covid-19, social-isolation, self-quarantine and elbow pump – all words which have been pressed into the public consciousness in the past few weeks, as the pandemic continues to spread.
Another two are social distancing and “to flatten the curve”. These are two issues that governments globally are most interested in, as the lockdown continues to keep billions of us at arm’s length (well actually two metres) from one another.
However, the longer the lockdown persists, the more pain we will see in the global economy. And the bad news is already seeping through, with companies furloughing their staff and further job losses on the horizon – a recession seems inevitable.
There is also pain for investors, who have already seen the value of their portfolios plummet and are now set to see their income returns cut too. It’s not good news particularly for those at, or approaching, retirement.
UK dividend cuts
The UK is in the eye of the dividend storm with many companies struggling with significant falls in revenue.
According to Link Asset Services, 45% of UK companies have already scrapped payouts to shareholders. Link’s best-case scenario would see total UK dividends fall by around 27% in 2020, while its worst-case scenario could be a fall of 51% to £48bn (from £98.5bn in 2019).
Link says the biggest cuts will come from the banks, where some £13.6bn is set to be slashed from this year’s total, followed by the mining sector. Oil companies comprise half of the at-risk segment for dividends. The safest groups include food & drink, tobacco, utilities, food retailers, healthcare and basic consumer goods.
The key for income investors from this point forward will be diversification – both in terms of geography and asset class – to maintain a reasonable source of dividend returns. Asian companies, for example, are also pressured by factory shutdowns and falling demand this year, yet their higher cash flows could help to sustain dividend payments.
Here are a few options for investors to consider:
LF Gresham House UK Multi Cap Income
For those wanting to stick to the home market I would plump for a fund that can invest in companies of all different sizes to garner an income. A good example is the LF Gresham House UK Multi Cap Income fund, managed by Ken Wotton. The portfolio deliberately ignores parts of the market such as oil and gas, mining and property, preferring to focus on smaller companies to find its edge.
Guinness Global Equity Income
This fund takes a concentrated approach with 35 equally weighted stocks in the portfolio to minimise company specific risk. To add a new holding, the managers must have enough conviction in its long-term story to remove another. The fund has a bias to high quality growth stocks and filters companies out based on their business model and balance sheet strength, rather than dividend yield.
Jupiter Asian Income
This fund invests in large companies with reliable dividends that can deliver both income and growth for investors. It invests mainly in developed Asia, which, in addition to its income mandate, makes it a relatively defensive Asia Pacific option. The process will predominantly look for companies with a higher dividend yield but has scope for up to 20% in stocks that offer dividend growth opportunities which will help increase the fund’s dividend over time.
Alternative to equities
Other asset classes also offer attractive dividends to investors, as well as diversification. A good example would be the infrastructure sector, which has grown in stature in the past decade as an alternative to equity income.
VT Gravis UK Infrastructure Income invests mainly in investment trusts exposed to different types of UK infrastructure; from railways and roads to GP surgeries and solar power. It has an income target of 5% per annum, which is distributed quarterly, and offers exposure to a less volatile and higher-yielding area of the UK economy.
Darius McDermott is managing director of FundCalibre