FSA Guide to the Art of Income Investing - HK Version 2016 | Page 8

ASSET CLASS OUTLOOK

Income outlook by asset class

LOOKING OVER
D

DIVIDEND INCOME

ividend disappointments have raised eyebrows: RollsRoyce is cutting its pay-out for the first time in 24 years,
retailers are slashing theirs in the face of growing price
pressure and oil companies are pondering whether they can
make any payments at all. Yet, encouragingly in 2015 saw a
sharp increase in special dividend payments, with Direct Line
Insurance, Lloyds Banking Group and Taylor Wimpey among
those to return additional cash to investors in this way.
Royal Dutch Shell, meanwhile, decided to maintain its
annual dividend despite seeing its profits tank by 80%. While
the outlook for dividends is not altogether rosy, there are
opportunities to be had. Cashflow will be key: any companies
whose earnings have been hit or which have significant
expansion plans in the pipeline could have less cash to put
towards dividends.
With commodity prices likely to remain low, energy
dependent companies may well boost their dividend payouts.
For example, look for airlines and food producers to increase
payouts. General Mills, Macdonald’s and Colgate-Palmolive
are so called ‘dividend aristocrats’ and have increased their
dividend consecutively for 25 years showing it can be done in
all seasons, providing careful equity income investors comfort.

G

3 year performance
30%

15%

0%
28/2/13

31/10/13

30/6/14

28/2/15

31/10/15

-15%

Index : The BofA ML 1 10 Year US Treasury TR
Index : MSCI World High Dividend Yield GTR

GOVERNMENT INCOME

overnment bonds on both sides of the Atlantic have
suffered in recent times, with China’s slowdown and
worldwide market instability prompting a flight to quality
that has seen the yield on both 10-year treasuries and gilts fall
to a little over 1%.
This is not expected to change significantly in the short to
medium term, with Trading Economics predicting that 10-year
treasuries will be yielding a little over 3% by 2020 while 10-year
gilts will be yielding just under 3%.
Across Europe, Swiss government bonds remain in negative
territory, with the yield on its 10-year offering sitting at just
under -0.2%. With the figure expected to stay below zero at
least until 2020, investors will essentially be paying to hold
these securities for some time to come.
In such an environment, emerging markets continue to offer
the best in sovereign bond yields, with the negatives in Asia in
particular already priced in. India, Indonesia, Pakistan and
Vietnam all have 10-year bonds yielding over 5% while in Africa
yields on Kenyan, Nigerian and South African government
securities are all in double-digit territory.

08

45%
World
High Dividend vs US Treasuries

Developed Sovereign vs US Treasuries
3 year performance
12%
8%
4%
0%
28/2/13

31/10/13

30/6/14

28/2/15

31/10/15

-4%

Index : HFRX Fixed Income Sovereign TR in US
Index : The BofA ML 1 10 Year US Treasury TR

Fund Selector Asia Guide to the Art of Income Investing March 2016 www.fundselectorasia.com