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UK dividends under pressure: what’s the answer for income investors?

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22/02/2016
The UK market has traditionally been a good place for income seekers but the outlook is deteriorating and investors are worried.

A poll of 2,000 personal investors by The Share Centre found 56% are concerned more companies will cut dividends this year.

Interestingly, the study was carried out BEFORE a raft of FTSE-100 firms including Rio Tinto, Rolls Royce and Centrica, all announced dividend cuts. BHP Billiton is also predicted to slash its dividend by as much as 75% when it reports this week.

The concentrated nature of the FTSE 100 has long been a concern for investors with the bulk of dividends coming from just 10 companies.

A large proportion of these companies are miners, resource companies and banks and many have seen earnings suffer as a consequence of the low oil price or falls in commodity prices.

Adding to the worries, dividend cover – a measure which indicates the likelihood of a company being able to pay its dividend out of earnings – has fallen in recent years to a low of 1.2 times.

Richard Stone, chief executive of The Share Centre said: “Investors have seen share prices fall sharply as a result of global economic concerns and the stock market enter ‘bear market’ territory having fallen over 20% since its peak in early 2015. Cuts to dividends, reducing income, will be a double whammy for personal investors.”

So what’s the answer?

According to Adrian Lowcock, head of investing at Axa Wealth, investors should consider looking globally for income and consider alternative assets to traditional equity income and bond funds.

He recommends the following three funds:

Architas Global Diversified Real Assets: The fund looks to invest in an array of alternative assets which produce an income. The aim is to have a portfolio of investments which over the longer term are uncorrelated to equities and bonds. Itinvests in infrastructure projects, airplane leasing and catastrophe financing producing a portfolio which aims to provide a stable long term dividend yield of around 3.6%.

Schroder Asia Pacific Income: Asia is out of favour and has been for many years. It has had a poor start to 2016 as concerns over China’s growth weighed on the region. However, valuations are attractive, compared to developed markets with some excellent long term opportunities. Picking the right manager for this market is essential. Richard Sennitt is a very experienced manager and has been investing in Asia for over 21 years. The fund invests in companies which are financially sound, profitable with proven management focused on shareholder returns.

PFS Chelverton UK Equity Income: The fund has three objectives; capital preservation, increasing dividend payments by the rate of inflation, and an increase in capital values. To achieve this the managers will invest in companies that can demonstrate strong balance sheets and cash flows, with the prospect of growing earnings supported by dividend payments. The fund has a focus on small and Mid-sized companies which offer a prospective yield that is 50% greater than the FTSE Mid and Small cap average yield.

 

Lowcock’s three tips for income investors:

1. Look for growing dividends: Don’t just look for the companies and funds with the largest dividends, but consider those where the dividends are set to grow. A growing dividend especially where it is not fully appreciated by the market will not only bring a growing income to your portfolio but will also help your portfolio grow.
2. Protect your capital: Taking risk or sacrificing your capital in return for a better income can be very dangerous; as the value of your portfolio shrinks the amount of income it generates will also get smaller, so each year you will need to take more capital. Without careful planning you may run out of money sooner than you realise.
3. Diversify: Diversifying helps reduce the volatility of the value of your portfolio and reduce the risk of losing money. The same applies to your income sources, the more different sources your income comes from the less volatile your income stream will be and the less risk that it stops entirely.

 

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