The ability of investment funds and trusts to provide investors with a regular and growing income is often underrated. Many investors still regard them as a way of accumulating capital, rather than as a means by which they can use capital to supplement their income. Yet for many of the 2019 Money Observer Rated Funds, income generation is one of the primary objectives; and historically they have proved they can deliver.
Four years ago, we asked how much an individual would need to invest in order to generate an annual income of £10,000 from corporate dividend payments. Rising yields have allowed us to reduce the amount each year and still meet the income objective, but 2018 proved a stiffer test and requires some explaining.
TR 1 year 11.4%, 3 years 75.8%, yield 0.5%
Income-seekers should proceed with caution amid growing headwinds – a mature economic cycle, rising interest rates, the withdrawal of fiscal stimulus and a return to financial market volatility.
“There has been a significant search for yield over the past few years, and as we’re nearer the end of the investment cycle than the beginning, the risks associated with a hunt for income have increased,” says Justin Oliver, deputy chief investment officer at Canaccord Genuity Wealth Management.
Companies around the world handed out a collective $354.2 billion in the third quarter of 2018, according to Janus Henderson’s Global Dividend Index.
That puts headline growth for global dividend payments at 5.1% compared to the same quarter last year.
The UK equity market lagged international stock markets in the first half of 2018, and it was the same story in the third quarter, with the FTSE All-Share index posting a loss of 0.8 per cent. In contrast, the FTSE World index returned 6.2 per cent in sterling terms.
While the underperformance of UK equities may whet the appetite of more contrarian-minded investors, as far as our model portfolios are concerned, it was a big factor behind eight of the 12 falling short of their relevant FTSE UK Private Investor index benchmark in the three months to 1 October.
Markets shook off a rocky start to 2018 to return to form during the second quarter – and propel the Money Observer model portfolios firmly back into the black.
All 12 of our portfolios beat the relevant FTSE UK Private Investor index benchmark during the three months to the end of June – some by as much as 3.5 per cent. That saw them recoup losses incurred during the volatility that pervaded investment markets in the first quarter of the year – and then some.
The one attribute that income investors arguably prize over any other is consistency – particularly those who use their investments to fund or supplement their lifestyles in retirement. For this growing band of investors taking advantage of the pension freedoms, a dividend cut is likely to hit the income they pay themselves in retirement.
Average dividend cover – a measure of how sustainable dividends are – has doubled since this time last year among the FTSE 350 companies, according to research by The Share Centre.
Dividend cover is the ratio produced by dividing profit after tax by the total dividends paid out to shareholders. A higher ratio suggests the company has the cash to sustain dividends more comfortably and affordably.
The Asian market is showing signs of life again, after seven years of flat earnings growth. The tiger economies are waking up and are on the prowl, led by a resurgent China. Asian stocks excluding Japan outperformed the world in 2017, and many analysts believe the region is likely to continue its growth story through 2018 and into 2019 – though of course, analyst forecasts are by no means a guarantee of good performance.