The UK stock market is a strong and reliable source of revenue from major companies that pay dividends.
However, as the world emerges from the epidemic and investors become more and more focused on the importance of companies’ ESG credentials, it may be time to start looking elsewhere in the world for the returns on your portfolio.
Research by Henderson International Income Trust (HIIT) shows that global companies have been in a strong position to protect their profit margins for nearly a decade, as profits rebound after the epidemic.
Global equity fund managers are looking to Asia for profit
But despite a bounce back in profit this year, UK firms that cut payments by 12 per cent of the average global reduction in 2020 are still vulnerable to shocks.
Dividend cover – the potential for next year’s profit forecasts to offset the company’s recent gross annual dividend – fell sharply in the UK in 2020 and will recover more slowly, according to HIIT.
It forecasts an average 1 x dividend cover for UK firms in 2021, and 2.1 times the global average.
Contrary to those figures, GAM Adrian Gosden’s investment director and UK equity revenue manager believe the UK’s outlook is still strong, with dividends ‘returning in size and speed’ and tailwinds in the shape of ‘unprecedented corporate activity’.
But investors are beginning to lose confidence in UK equity income funds, Investment Association figures show that funds have been withdrawn every month since September, with a total of £ 4.3bn withdrawn.
All five UK-listed Asian Revenue Trusts are currently trading at a discount to NAV
Ben Peters, fund manager of EvenLoad Global Income Fund, said: ‘Last year the UK had a very tough experience [in terms of dividends] And it has rebounded quite strongly.
‘But, although it has historically been considered a source of income market, with a slightly higher yield in the UK than elsewhere in the world, that perception is changing.’
He explained that many UK companies that had previously opted for bumper dividends were now choosing to reinvest themselves or return money to investors through share repurchases.
The COP26 will serve as a reminder of investor preferences for years to come, and the need to limit exposure to more environmentally damaging companies.
This puts the UK at a disadvantage, given the FTSE 100-volume ratio, such as oil, mining and industrial stocks, all of which traditionally represent the largest dividend payers.
But, following the coronavirus epidemic, UK investors are in need of returns.
According to research by the Association of Investment Companies, about 87 percent of income investors have lost dividends due to the epidemic, with 28 percent reporting a ‘substantial’ or ‘large’ impact on their portfolios and 29 percent doing so. Changes their capital to address this loss of income.
Nick Clay, portfolio manager of RWC Global Equity Income Strategy, explained that after the epidemic, ‘the world is becoming more balanced in terms of where you can find income’.
‘Because of the concentration risks in some high yielding markets people are trying to look elsewhere and globally, the UK is one of them.
And, obviously, the density around energy stocks and tobacco inventory, [for example] It forces people to think more widely about how and where they collect their income.
Income reduction: Steps taken by people to increase investments (Source: Association of Investment Companies)
While investors have not flooded into global equity income funds, they have performed better than their UK counterparts, with British investors pulling in just £ 101 million from vehicles in the year to September.
An increasingly popular area of global markets for income investors is Asia Pacific ex-Japan, where there are signs of improvement.
HIIT data shows that Asia-Pacific is the only global region, with dividend cover flattened by 2020, companies’ cash buffers beating out North American, UK and European peers and shutting down emerging markets rivals.
LOVEBYLIFE data shows that the MSCI AC Asia Pacific Ex-Japan Index still lags behind 3.6 per cent of FTSE All Share, with a historical yield of 2.2 per cent a year. However, this is significantly higher than the S&P 500’s 1.3 percent contribution.
The index grew 25.8 percent in three years, surpassing the 9.5 percent return of FTSE All Share.
Mark Williams, fund manager at Somerset Asia Income Fund, said: ‘Nowhere in the world does Asia offer such strong growth and revenue mix.
|Index||One-year historical yield|
|MSCI AC Asia Pacific X Japan||2.2%|
|FTSE Share All||3.6%|
|The S&P 500||1.3%|
‘There is a strong dividend culture in the UK but growth is quite limited, but there are some strong growth pockets in the US but little emphasis on dividends. There is a sweet spot of growth in Asia, with yields and most importantly these dividends growing.
Williams added that the outlook for Asian dividends continues, with the region’s technology sector being a particularly strong source of future revenue.
He said: ‘The Asian growth story is well established but recently the dividend story has emerged. We find numerous opportunities around the region where companies with sustainable, long-term earnings growth with lower leverage and equally lower pay-out ratios.
“Effectively companies do not pay dividends to reward shareholders, but retain enough earnings to invest in future growth.
British investors who want to target Asian dividends have more options through active funds, investment trusts and cheap exchange-traded funds.
All five UK-listed Asia Equity Income Trusts currently offer an attractive entry point of an average of 5.3 percent through discounts on net asset value. The best performing of these are Invesco Asia, with 10-year revenues of 227.5 percent, and JPMorgan Asia growth and revenues of 115.4 percent with five-year revenues.
Dividend cover trends: UK companies lag behind other regions as domestic companies tend to pay dividends
For daily business funds, Darius McDermott, Managing Director of Chelsea Financial Services, recommends Schroder Asian Revenue.
He explained: ‘The manager’s experience, combined with the strength and depth of the Schroders’ analyst team, make this fund stand out.
‘They look for companies that offer attractive yields and – most importantly – growing dividend payments.
‘They are investing across the Asia Pacific region, including Australia and New Zealand, while the flexible mandate has helped to manage a well-diversified portfolio and returns at 4 per cent.’
For investors looking for a broad source of income through a global approach, McDermott Clay’s RWC Global Equity advises them to be the ‘most experienced team’ behind the returns.
He explained: ‘His process is well-proven – he buys controversy and sells consensus – and it has a high yield in the sector of 2.3 per cent, with the team actively looking for physically higher returns than the market. Produces. ‘
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