As UK income equity stalwarts suspend or scrap their dividends in the wake of the Covid-19 lockdown, Quilter Investors’ Helen Bradshaw believes investors should be looking at the new breed of ‘dividend heroes’.
Asian equities, infrastructure and real estate are the three sectors Bradshaw recommends considering in order to help make up the dividends lost during this crisis.
Oil giant Shell has cut its dividend for the first time while payouts from the banking sector have been suspended for the immediate term. But no sector appears to be immune from the crisis, with plenty of other businesses cutting their dividends.
Quilter portfolio manager Helen Bradshaw believes this situation is an opportunity to look at different investment sectors in order to achieve a sustainable income yield over the long term. Investors can diversify their portfolios to avoid relying solely on the traditional dividend paying businesses from the FTSE, she argued.
“There are many other sectors out there that can provide a similar yield to the FTSE 100, so having a blend of assets and geographies, including the UK, will give investors the additional benefits of dividend cover, diversification and liquidity,” she said.
While the worst still may yet to be come for income investors, Bradshaw is still confident on the UK business keeping their dividends intact.
“While the UK remains important to investors from an income perspective with many big businesses keeping their dividend in place, they must remember that pay-outs here were already highly concentrated to just a handful of companies, so volatility in the markets will always have an impact”.
Below are the three sectors and funds that the portfolio manager thinks could be the new ‘dividend heroes’ to help diversify and protect investors’ incomes from the significant cuts in the market.
Asian equities
Within this part of the market, Bradshaw picked the Schroder Asian Income fund. Managed by Richard Sennitt since 2001, the fund invests in high growth Asian companies, excluding Japan but including Australia and New Zealand.
With a strong income ethos and has a bias towards high-dividend-paying companies, which means it could be less volatile than other funds focused on Asia. Sennitt will also own stocks that have a lower yield but strong capital growth potential, leading to a well-balanced portfolio.
Performance of fund vs sector over 1yr
Source: FE Analytics
Although not a traditional destination for income investors, Asian equity can be an attractive option. Bradshaw said: “While Asia is not a place traditionally associated with a strong dividend culture, many of the corporate governance reforms we have seen in this region have encouraged one to begin to flourish.
“As such, we expect less dividend cuts in this area as the pay-out ratios are lower and many of the businesses have taken on low amounts of leverage. This should provide investors with a feeling of stability in knowing what yield to expect to receive.
“Furthermore, as we emerge out of this crisis these businesses are also more likely to grow their dividends given the room they have to do so, compared to businesses in the UK.”
Infrastructure
Infrastructure is a popular area with income investors and Bradshaw’s pick here is Amber Infrastructure Group’s International Public Partnerships (INPP) trust. The company aims to provide its investors with long-term, inflation-linked returns by growing its dividend and creating the potential for capital appreciation.
Its assets are located around the world, including the UK, Australia, Europe and North America, and it invests in high quality infrastructure projects and businesses that are resilient over the long term.
Performance of fund vs sector over 1yr
Source: FE Analytics
“Infrastructure investments, particularly those focused on availability based assets, tend to be less correlated to the wider stock market, meaning in times of a downturn they should offer an element of protection,” said Bradshaw.
Furthermore, the portfolio manager said infrastructure investments are unique in the sense that the visibility and security of their underlying cashflows are hard to replicate elsewhere.
“Many of the investment trusts offering exposure to this asset class have seen premiums contract year to date and with income yields between 4-5 per cent and with healthy levels of dividend cover, these are attractive investments for people looking for a sustainable income stream,” she added.
Real estate
The last fund to make the Helen Bradshaw’s list is Assura Plc (AGR), which is a healthcare real estate investment trust. It develops, owns and manages primary care property. It is also engaged in relationship-building with general practitioners in order to secure investment opportunities.
Performance of fund vs sector over 1yr
Source: FE Analytics
Despite the UK shutdown calling into question the rental income streams for many property funds, Bradshaw said there are specialist areas within real estate that could serve to be good diversifiers of an investor’s income stream – such as those focused on healthcare.
“There are some specialist real estate investment trusts which have more predictable business models as well as the benefit of government backed streams of income through tenants such as the NHS, meaning investors can feel confident that payments will still be made during this difficult time,” she concluded.