In focus
accounts for more than 20 per cent
of the FTSE All Share’s income. Most
worrying of all is that this comes
from just two companies – Royal
Dutch Shell and BP.
Standing still
A lack of diversification is not
the only problem with UK equity
income. Aside from oil & gas, other
major contributors to the dividend
yield include banking and tobacco –
all industries that can be described
as mature at best, and certainly in
the latter’s case, one that looks as
though it has already started its long-
term decline. This is reflected in
the dividend cover – the UK’s figure
of 1.6x is the third-lowest of the 15
The subject of dividend
growth is becoming ever
more important for income
investors, with retirement
set to account for a greater
proportion of people’s lives
major stock markets in the world,
according to the latest Henderson
International Income Trust (HINT)
Global Dividend Cover report.
Steven Hay, manager of the Baillie
Gifford Multi Asset fund, believes
this does not show the true scale of
the problem, with industries such as
tobacco and oil & gas later on in their
life cycle than many professional
investors think.
FTSE ALL SHARE YIELD GENERATION
49.4% Rest of index
2.0% Imperial Brands
2.3% Vodafone 6.9% BP
2.5% Lloyds 8.7% HSBC
3.1% Rio Tinto 12.8% Royal
Dutch Shell
3.1% AstraZeneca
4.2% GlaxoSmithKline
5.0% British American Tobacco
Source: Liontrust. As at 31.10.19
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“Not only are we looking for good
income characteristics, it is a lot about
the resilience of the dividend,” he
explains. “We are looking for equities
that can grow as well, that is a really
important part of our strategy. And the
judgment of James [Anderson, head
of global equities] and his colleagues
is that those particular names are not
names that can do that.”
Growing pains
The subject of dividend growth is
becoming ever more important for
income investors, with retirement
set to account for a greater
proportion of people’s lives. This
requires an increase in underlying
earnings to be sustainable, yet while
tech has driven much of the growth
in world markets over the past
decade, this is a sector noticeable by
its absence in the UK market.
The flipside to this is that most of the
FAANG – Facebook, Apple, Amazon,
Netflix and Alphabet (Google) – stocks
don’t pay dividends anyway, yet
Richard Saldanha of the Aviva Global
Equity Income fund says this doesn’t
stop his clients regularly bringing them
up in conversation. His response is not
to temper their expectations, however,
but to find dividend-paying companies
that can benefit from the same trends.
“We use the example of Amazon,”
he says. “It’s a great company, but
you can’t invest in it from an income
perspective. We looked at the cloud
business it has with AWS [Amazon
Web Services] and invested instead in
Microsoft, which does pay a dividend.
“Similarly, if you are interested in
electric vehicles, you can’t own Tesla,
but you can own a company called
Texas Instruments in the US which
is a semiconductor manufacturer
that supplies all the chip content that
goes into electric cars. I guess for us,
we don’t look at it as a disadvantage.”
The place to be
While the US is the go-to region for
tech stocks and has an established
dividend culture of its own, income
investors may find it difficult to live
off the S&P 500’s current yield of
about 1.75 per cent.
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