Investors have been struggling to find income of late, with bonds offering little while many of the defensive equity holdings have seen their share price inflate in recent months. 
This is not just a problem in the UK, but globally, with the Federal Reserve’s unwillingness to raise interest rates, coupled with loose monetary policy and quantitative easing from the likes of the European Central Bank and Bank of England making life for income investors more difficult.
With this background, savers are moving into riskier assets, such as equities, but even there the prices of many of the most stable income-payers have become inflated to levels that some see as unsustainable.
FP Miton Income’s dividend history since 2011
Source: FE Analytics *figures based on a £10,000 investment in January 2011
As a result, Eric Moore (pictured) – who’s five crown-rated Miton Income fund yields 4 per cent and has grown its dividend every year since he has been at the helm – outlines some of the main areas he is looking at to provide income in the testing market conditions.
Pharmaceuticals
“I like pharmaceuticals because the regulatory burdens are getting easier, you’ve got the new drugs and technology coming through after a long period of disappointment, and they’re not that reliant on economic growth which I’m not that bullish on,” Moore said.
The introduction of MediCare in the US has boosted demand for new drugs while many of the largest pharmaceutical companies are nearing the end of clinical trial programs.
Performance of sector over 5yrs
Source: FE Analytics
While the pharmaceutical sector has been seen as one of the ‘expensive defensive’ sectors in recent times, as evidenced by the spike in share prices following the EU referendum, Moore says they are still producing good returns for investors.
“You’ve got quite high starting dividend yields still and you do have the prospect of dividend growth in some cases,” he said.
“While Glaxo[SmithKline] isn’t growing its dividend, many of the other companies are and I think the prospect for dividend growth in the medium term is still okay.”
As well as this, fears over whether or not pharma companies would be able to maintain their dividends have subsided since the Brexit vote as the fall in sterling has meant many – which sell their products in US dollars – now have higher earnings cover.
In Glaxo’s case, Moore said: “The dividend was not very well covered by earnings but the majority of their business is in America so the dividend is more comfortably covered now.”
Both Glaxo and fellow pharma giant AstraZeneca yield around four per cent currently, and Moore adds that both have the propensity to grow their dividend in the long-term, even if short term growth seems unlikely.
Oil
“The one that is a bit of a teaser is oil,” Moore said, as oil stocks currently offer very attractive yield in part thanks to the fall in share prices following the drop in the oil price last year and concerns that some of the largest companies in the space may have to cut their dividend.
He particularly likes BP and Shell, which together make up around 10 per cent of the FTSE 100, as both are yielding around seven per cent.
“In fact it’s so much that you should be sceptical of it because generally in my experience if something yields more than six it’s a red flag.
“The market is saying danger - this dividend will be cut – but BP and Shell are saying they’re not going to cut their dividend.”
Performance of stocks vs oil price over 2yrs
Source: FE Analytics
The oil price has fallen 54 per cent over the last two years, and the oil stocks have fallen in tandem, but received a boost following the Brexit vote as all their finances are denominated in dollars.
Moore said: “What’s interesting is these companies declare their dividend in dollars because they’re dollar businesses. So Shell pay 181 cents and because of Brexit this year that’s worth 15 per cent more than last year in pounds.”
“This share is now yielding seven per cent with a dividend growth of 15 – I’m kind of a bit more tuned onto it than I was before.”
He caveats, that if the oil price does not rise to $60 by 2020 then it is likely that the likes of Shell and BP will have to cut their dividends, but as it stands at the moment investors are going to be getting a high yield this year.
Moore adds that these companies – after a period of denial – are now cutting costs, defending the balance sheets and making decisions to try and ensure the dividend will not be cut.
Insurance
The final area Moore likes is insurance, where, unlike pharmaceuticals, the sector looks set for a boost from an increase in regulations.
“There’s lots of regulation change going on in pensions and savings there’s a demand for more savings products,” he said.
“As a citizen you can no longer rely on your employer in your old age – or indeed the government –so there is a savings gap and these guys have got products to fill it. This basically forces money into these companies.”
Performance of stocks over 5yrs
Source: FE Analytics
The three stocks Moore highlights are Standard Life and Legal & General, which both yield more than five per cent, and St. James’s Place, which also has an attractive yield.
“We think there are good and growing income and perhaps meatier growth is in life insurance,” Moore said.
“Companies like Standard Life, Legal & General and St James’s Place are growing their dividend by 10 or 12 per cent because they’re in a sweet spot at the moment.”
