Clouds gather over sources of investment income
Thursday 21 Nov 2019 Author: Daniel Coatsworth

The search for reliable income remains a tough challenge for investors and unfortunately that quest is becoming even harder as corporate profit warnings rise, potentially leading to dividend cuts.

The UK’s FTSE 100 index offers one of the highest yields in the world at 4.6% which is attractive relative to the poor returns you would get from cash in the bank. It is also more generous than many other major markets in the world such as 2.3% from the US’ S&P index and 3.7% from Hong Kong’s Hang Seng index.

Unfortunately investors must appreciate that these yields are not fixed and so future streams of income can go up and down.

As we discuss in this week’s news section, the outlook for dividend growth is less than rosy. A report by asset manager Janus Henderson suggests that dividend growth is slowing. This matters because investors should really seek sources of income that are growing by at least the rate of inflation to sustain their purchasing power.

Last week saw AJ Bell host its annual Investival event for financial advisers that included a session on income investing. In it, Adrian Gosden, a fund manager at GAM, said that investors should consider static dividends as a key risk for 2020.

He made the point that a sluggish economy could make it difficult for companies to win new contracts and thus make it hard for them to grow their dividends. Companies that can achieve dividend growth should therefore be seen as prized assets in a portfolio.

Also presenting at Investival was Edward Bonham Carter, vice chairman of asset manager Jupiter, who made the point that stock selection is very important when it comes to finding income on the markets because of rising levels of corporate profit warnings.

We’ve already seen FTSE 100 stocks such as Vodafone (VOD), Centrica (CNA) and BT (BT.A) cut dividends in recent years and a tougher economic backdrop could put a financial strain on other businesses and lead to reduced shareholder rewards.

It is never been more important to seek diversified sources of income. This can be achieved by investing in different sectors and geographies and not being reliant on just a handful of stocks for dividends.

With this theme in mind, next week’s issue of Shares (28 Nov 2019) will look at a selection of income funds that would suit either someone in retirement or someone looking to invest in cash generative companies who can then reinvest all the dividends to enjoy compounding benefits.

DISCLAIMER: AJ Bell is the owner and publisher of Shares. The author owns shares in AJ Bell.

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