HomeFinanceUK dividends look vulnerable: is it time to invest elsewhere income?

UK dividends look vulnerable: is it time to invest elsewhere income?

The UK stock market has long been a source of strong and reliable income from major companies paying dividends.

But, as the world emerges from the pandemic and investors increasingly focus on the importance of companies’ ESG credentials, it may be time to start looking elsewhere in the world for income in your portfolio.

Research from Henderson International Income Trust (HIIT) shows global companies are in the strongest position to defend their dividends for nearly a decade, as profits bounce back after the pandemic.

Global equity fund managers are looking to Asia for dividends

Global equity fund managers are looking to Asia for dividends

But despite a bounce back in dividends this year, UK firms, which slashed payouts by 41 per cent versus an average global reduction of 12 per cent in 2020, are still among the most vulnerable to shocks

Dividend cover – the capacity for next year’s profit forecasts to cover a company’s most recent total annual dividend – fell most harshly during 2020 in the UK and will recover more slowly, according to HIIT.

It forecasts an average of 1 x dividend cover for UK firms in 2021 versus a global average of 2.1 times.

In contrast to those figures, investment director and UK equity income manager at GAM Adrian Gosden still believes the outlook for the UK remains strong, with dividends ‘returning in size and at velocity’, and tailwinds in the shape of ‘unprecedented corporate activity’.

But investors are beginning to lose faith in UK equity income funds, with Investment Association figures showing that money was withdrawn from the vehicles in every month in the year to September, with a total of £4.3billion withdrawn.

All five UK-listed Asian income trusts are currently trading at a discount to NAV

All five UK-listed Asian income trusts are currently trading at a discount to NAV

Ben Peters, fund manager on the Evenlode Global Income Fund, said: ‘The UK did have a very tough experience last year [in terms of dividends] and it has rebounded quite strongly.

‘But, while it has historically been looked upon as a source of income market, with slightly higher yields in the UK than elsewhere in the world, that perception is changing.’

He explained that many UK companies which may have previously opted for bumper dividends are now either choosing to reinvest in themselves or return money to investors via share buybacks.

COP26 also serves as a reminder of investors’ priorities in the years ahead and the need to limit exposure to more environmentally destructive companies.

This leaves the UK at a potential disadvantage given the outsized proportion of the FTSE 100 attributed to the likes of oil, mining and industrial stocks, which all traditionally represent the index’s biggest dividend payers.

But, after the fallout of the coronavirus pandemic, UK investors are in need of income.

Some 87 per cent of income investors lost out from dividend cuts due to the pandemic, according to research from the Association of Investment Companies, with 28 per cent reporting a ‘considerable’ or ‘big’ impact to their portfolios, and 29 per cent making changes to their portfolio to address this loss of income.

Portfolio manager of the RWC Global Equity Income Strategy Nick Clay explained that, post-pandemic, ‘the world’s becoming far more balanced with regards to where you can find income’.

‘People are trying to look elsewhere and globally to because of concentration risks in certain high yielding markets, the UK being one of them.

‘And, obviously, the concentration around energy stocks and tobacco stocks, [for example] is forcing people to think more widely about how and where they raise their income from.’

Income cuts: Measures people have taken to bolster investments (Source: Association of Investment Companies)

Income cuts: Measures people have taken to bolster investments (Source: Association of Investment Companies)

While investors have not flooded into global equity income funds, they have fared far better than their UK peers, with British investors pulling just £101million from the vehicles in the year to September.

An increasingly popular area within global markets for income investors has been Asia Pacific ex-Japan, where there are signs of improvement.

HIIT data shows Asia Pacific ex-Japan is the only global region where dividend cover flatlined rather than collapsed during 2020, with companies’ cash buffers beating North American, UK and European peers, and closing in on emerging markets competitors.

With a one-year historic yield of 2.2 per cent, the MSCI AC Asia Pacific ex-Japan index still lags the FTSE All Share’s 3.6 per cent payout, Bloomberg data shows. However, it is significantly above the S&P 500’s offering of 1.3 per cent.

The index has also delivered growth of 25.8 per cent over three years, outpacing the FTSE All Share’s return of 9.5 per cent over the same period.

Fund manager of the Somerset Asia Income Fund Mark Williams said: ‘Nowhere in the world offers such a compelling combination of growth and income as Asia.

Yield comparison  (31 October)
Index  One-year historic yield 
MSCI AC Asia Pacific ex Japan 2.2%
FTSE All Share  3.6% 
S&P 500  1.3% 

‘In the UK there is a strong dividend culture but growth is quite limited, whereas in the US there are some strong pockets of growth but there is less emphasis on dividends. In Asia there is a sweet spot of growth, yield and importantly these dividends are growing.

Williams added that the outlook for Asian dividends remains strong going forward, with the region’s technology sector a particularly strong source of future income.

He said: ‘Asia’s growth story is well-established but more recently the dividend story has emerged. We find numerous opportunities around the region where companies have sustainable, long-term earnings growth, with low leverage and equally low pay-out ratios.

‘Effectively companies not only pay out dividends to reward shareholders, but also retain enough earnings to invest for future growth. This, combined with improving corporate governance and dividend cultures, supports a strong case for dividends to grow, which in turn should also lead to capital appreciation.’

British investors wishing to target Asian dividends have plethora options via active funds, investment trusts and cheap exchange-traded funds.

All five UK-listed Asia equity income trusts currently offer an attractive entry point via a discount to net asset value, at an average of 5.3 per cent. The best performing of these are Invesco Asia, with a 10-year return of 227.5 per cent, and JPMorgan Asia Growth & Income with a five-year return of 115.4 per cent.

Dividend cover trends: UK lags behind other regions as homegrown companies tend to pay out their profits in dividends

Dividend cover trends: UK lags behind other regions as homegrown companies tend to pay out their profits in dividends

For daily dealing funds, managing director of Chelsea Financial Services Darius McDermott recommends Schroder Asian Income.

He explained: ‘The manager’s experience, combined with the strength and depth of Schroders’ analyst team, make this fund stand out.

‘They look for companies that offer attractive yields and – importantly – growing dividend payments.

‘They invest all over the Asia Pacific region, including Australia and New Zealand the flexible mandate has helped maintain a well-diversified portfolio and income in excess of 4 per cent.’

For investors looking for a broader source of income via a global approach, McDermott tips the ‘very experienced team’ behind Clay’s RWC Global Equity Income.

He explained: ‘Their process is well-proven – they buy the controversy and sell the consensus – and it has one of the higher yields in the sector of 2.3 per cent, with the team actively looking for income that is materially higher than the market produces.’

How to calculate dividend cover 

Dividend cover is calculated as following: earnings per share divided by total annual dividend.

It’s best to use basic earnings per share, rather than underlying or adjusted earnings per share, because it’s the basic figure that usually sets the tone when companies decide dividends, according to Russ Mould of AJ Bell.

The total annual dividend is made up of the interim (first half-year) and final (second half-year) dividends added together.

Dividend cover figures for individual stocks are available online – check out BP’s shares page on This is Money, as an example.

But dividend cover figures may vary depending on where you look, because sometimes sites will use last year’s profit figure instead of a forecast profit figure.

Mould says you need to take care that the dividend cover figure takes any recent rights issue into account, that you’re aware of whether a company publishes its results in sterling or in a foreign currency, and that you know what share class was used if there is more than one (Shell, for instance, has A and B shares).

He adds that if you really want to research a company’s dividend cover thoroughly, you should work it out for the past eight years and for two years ahead, then calculate the average for the whole 10 years. 

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