Dividends from UK companies may not yet be as rare as hen’s teeth, but the income landscape for most investors has changed beyond recognition since the coronavirus struck. More down than up in terms of trajectory.
According to investment experts at AJ Bell, dividend payments from the country’s 100 largest stock market-listed companies are likely to plunge by a quarter this year – from £75billion to £57billion.
Some 35 of these companies have already either cut, deferred or cancelled their dividends while they grapple with the impact of coronavirus, with nine not paying a penny in income to shareholders. A raft of companies previously renowned for their dividend-friendliness – tobacco giant Imperial Brands, HSBC, BP and Shell – have all taken an axe to dividends.
Wind of change: A willingness to think outside the box when it comes to income is an approach lauded by most advisers
Though the outlook for next year is slightly better – and Tesco raising its dividend last week in response to a surge in profits was a welcome bright spot – this presupposes there will be no further alarming drop in economic activity caused by another lockdown.
Yet, it’s the present that matters most and for those reliant on dividends to top up their retirement or work income, the decimation has forced them to act.
Some have reassessed their household finances and made painful adjustments. Others have gone back to the drawing board and restructured their portfolios to find alternative sources of income from, for example, funds investing in clean energy such as wind and solar – forms of energy now firmly in the spotlight as a result of Boris Johnson’s promise last week to lead a ‘green industrial revolution’.
A survey of investors by the Association of Investment Companies published today confirms both trends. According to its findings, more than four out of five investors are worried about loss of dividend income, while 17 per cent have had to change their plans or lifestyle as a result of the financial hit they have taken, such as cutting back on non-essential spending or delaying retirement. Some 41 per cent say dividend cuts have had a significant impact on their investments.
‘On the one hand, the survey’s results make for grim reading,’ says Annabel Brodie-Smith, a director at the AIC. ‘The people we spoke to were fearful about the dividend outlook. Some believe the days of 5 per cent or 6 per cent annual dividends may never return.’ Yet it’s not all bad news, she says, adding: ‘Income investors may feel under siege, but some have taken the bull by the horns and applied new investment strategies to meet their income needs in a post-Covid world. Our research shows some investors have reduced their exposure to the UK, invested in global funds, and embraced alternative asset classes, such as infrastructure, renewable energy and property to replace lost income.’
This is what retired accountant Philip Rego, 56, has done. Philip, who moved out of London four years ago after a successful career with a leading firm of chartered accountants, has in recent months rebalanced the investment portfolio he manages and draws an income from. The income from the six-figure portfolio supplements the money his wife Justine, 51, earns from working in local government. As a result of restructuring the investments, he has ensured the stream of income it generates is not far off the level he had forecast at the end of last year.
‘I had a lot of money invested in the UK going into the General Election last year,’ says Philip, a keen landscape gardener and avid member of the Royal Horticultural Society. ‘Then, as coronavirus moved out of China and the UK stock market went into meltdown, I experienced the whole cycle of investment emotions – anxiety, fear and – as the market bounced back – relief and hope.’
It resulted in Philip sitting down and reviewing the 30-odd investment funds he held. He didn’t sit on his hands for long.
Blast of fresh air: Green funds are helping Philip and Justine Rego
Out went a raft of investment funds with a UK income bent – the likes of investment trusts Merchants and Lowland and investment funds Liontrust Macro Equity Income and Threadneedle UK Equity Income. In came funds with a focus on income generation from alternative assets. They included the likes of investment trust Tritax Big Box, paying shareholders a quarterly income of 1.5625p per share from the rents it earns on investments in big logistics centres, increasingly vital in e-commerce. Its shares currently trade at £1.61, making for a dividend income – or yield – of 4.3 per cent a year.
Given its focus on e-commerce, which has withstood the pandemic better than many sectors, the trust has suffered little from tenants unable to pay their rents – although it has trimmed the quarterly income from 1.7125p.
Philip has also bought investment trust Civitas Social Housing, which earns income from a portfolio of residential care homes. Income is quarterly and equivalent to 5 percent a year. Other new buys include exchange traded fund iShares Global Clean Energy Index, which invests in 49 global firms involved in energy generation from wind, solar and other renewable sources.
Philip continues to hold investment trusts JP Morgan Claverhouse and Aberdeen Standard Equity Income, saying they stand a good chance of continuing to grow dividends, having squirrelled away income in the past.
His willingness to think outside the box when it comes to income is an approach lauded by most advisers. They recommend investors also look at global income funds – the likes of Morgan Stanley Global Brands Equity Income, Troy Global Income and Evenlode Global Income. The final word goes to Laith Khalaf at AJ Bell. He says: ‘The one sure fire thing you can do to boost dividend income is to hold your income investment funds in an Isa to keep the taxman at bay.’
Though £2,000 of annual dividend income on shares held outside an Isa is tax-free, on a £100,000 portfolio yielding 4 per cent, another £2,000 would be exposed to tax, which, for a higher rate taxpayer, would mean a bill of £650, reducing the yield to 3.35 per cent.
‘Use your annual Isa allowance of £20,000,’ he implores. Absolutely.