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Finding dividends in current markets

19 August 2020

Investors have been hit by a slew of dividend cuts in recent months as businesses sought to deal with the effects of the Covid-19 crisis, but Quilter’s income portfolio manager Helen Bradshaw believes there are other ways investors can enhance their income streams.

The pandemic led 176 companies to cancel their dividend payouts in the second quarter, while 30 chose to cut their dividends.

The iShares Core FTSE 100 ETF, a good representation of the income opportunity offered by the largest 100 companies in the UK, saw its dividend per share plummet by 60% in June alone, compared to the same period last year.

Bradshaw says: “The dividend challenge in the UK and Europe has been well documented and with bond yields falling from already low levels, income investors must be feeling like there is nowhere to turn. However, there are ways investors can seek to add more resilience to their income streams, which may be prudent in the event of economic lockdowns returning.”

According to Bradshaw, investors should utilise investment trusts because their fund structure allows them to use revenue reserves to support dividends if there is a shortfall of income, leaving their dividends more resilient than their open-ended peers.

Investors should also look to widen their net, with the range of ‘alternative’ investments options gathering pace in recent years to encompass areas such as specialist property, infrastructure, renewable energy and music royalties.

Bradshaw explains: “Not only do alternatives typically have a lower correlation to more mainstream assets, but there are a number that offer an attractive level of income that is less sensitive to the economic backdrop.”

Lastly, Bradshaw says recent events have highlighted the importance of diversification, which not only protects investment returns from market volatility but can increase its income resilience in times of stress.

Bradshaw adds: “The UK equity market has been an income seeker’s friend over the long-term, but those dividends are concentrated to just a handful of companies.

“Even prior to this crisis, at the end of 2019 just 10 companies accounted for 50% of the FTSE All-Share’s yield. There are opportunities elsewhere that can help support your dividend stream and lead you away from such concentration risk.”

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