By Louis Wood, investment manager at Irwin Mitchell
The outbreak of the coronavirus pandemic in February last year saw swathes of companies reducing, or even cancelling, their dividend payments although this was far from universal and many companies such as Vodafone maintained theirs. Strong dividend payments continued throughout the worst of the pandemic, providing a core level of necessary income. Such an outcome, while to some may seem inconsistent with the worrying headlines about the impending pandemic and falling stock markets, shouldn’t be a surprise given the consistency of dividend payments over time.
All too often investors look just at the capital value of their portfolio. This is clearly important but for many investors attention should be paid to the income being produced as well as its consistency. Dividends represent an important element in the investment case for many companies and the management of these companies are reluctant to reduce them and place great store on their ability to have a “progressive dividend policy” whereby dividends are increased regularly, often in excess of inflation. What this means for investors is that by focusing on those companies with attractive dividends they can have a degree of confidence in the consistency and reliability of those payments, which they can regard as their income, in a way they cannot from capital gains as these will show a much greater degree of variability over the years.
With a strategy focusing on dividend income producing a generally consistent level of income through the most recent market disruption, as it has in the past an improving economic outlook, albeit one with some challenges, clearly means that the prospects for income investors have only improved.
By holding a number of different investments, including a core of high yielding UK Equities, an income yield of over 4% can be produced, which is significantly more than most savings accounts as well as the main UK index currently stands at 3.3%. By focusing on good quality UK companies it is possible to have a high degree of confidence in the income being produced as well as an element of protection against inflation reducing the spending power of the investments.
Equities are intrinsically linked to economic activity, and so provide indirect inflation protection. As prices rise, companies are able to pass on cost increases to customers so maintain profits. By contrast conventional fixed income instruments provide just that, a fixed level of income or coupon; as prices rise then the real spending power of the investors’ return is eroded.
But the focus doesn’t have to just be on equities as there are a number of other areas where it is possible to obtain regular and consistent levels of income while providing some protection against inflation. Alternative investments such as Infrastructure and Private Equity not only generate an organic level of income, but also provide a degree of inflation protection. Infrastructure projects, such as a toll bridge or gas pipeline, typically have very long contract lengths (20+ years) with underlying revenues that are linked to inflation. With the U.S. approving a $1tn infrastructure spending program, the background to these asset classes has further improved.
With interest rates at record lows across much of the World, many conventional Government Bonds are simply not attractive as they are so low thereby failing to provide the income savers need. Whilst it is possible to increase yield by holding lower grade corporate debt, there is a commensurate increase in risk and still has a relatively low yield as well as being vulnerable to even low levels of inflation.
There is an alternative way of producing an income most savers need, especially those relying on their pensions. As a standalone approach, or utilised with others, the benefits of a dedicated focus on high dividend income paying stocks has never been more attractive in these uncertain times.
The information given and opinions expressed are subject to change and should not be interpreted as investment advice. All data is sourced by IM Asset Management Limited unless otherwise stated. All financial and wealth management services are provided by IM Asset Management Limited which is regulated by the Financial Conduct Authority (FCA), FCA Firm Reference Number 402770 and registered in England and Wales under Company No. 05016348