The spread of the Covid-19 pandemic has put pressure on dividend-paying companies around the world to cancel payouts, but not all regions have been affected equally. As such, Kepler Partners analyst William Sobczak has highlighted several trusts that he thinks income-focused investors should consider.
Since March, the dividend landscape has changed drastically. Reliable sources of income cut their payouts for the first time in decades and the UK’s reputation as a dividend champion is becoming challenged.
Indeed, UK companies that have cancelled or cut dividends between now and the end of the year amid disruption caused by the coronavirus pandemic has been estimated at around £28.2bn, according to the Link Group.
The situation globally is different, according to the Janus Henderson Global Dividend Index, with payouts rising by 3.6 per cent during Q1 on a headline growth rate basis to a first-quarter record of $275.4bn. This figure is the equivalent to an underlying growth of 4.3 per cent and several countries, like the US and Canada, posted all-time quarterly record payouts.
However, the report anticipates that the next 12 months will be critical in understanding the long-term impact of the crisis.
Annual dividends by region in US$bn, *% change
Source: Janus Henderson Global Dividend Index
The percentage of dividends which are considered to be safe, vulnerable or which have been already been cut depending on region are shown in the table above.
Nevertheless, some regions will fare better than others, broadly related to government stimulus and lockdown policies as well how weighted they are toward pandemic-impacted industries.
Areas that were deemed high risk, included dividends of banks, consumer discretionary stocks and certain industrial sectors such as aerospace. Whereas it noted that technology companies were relatively unaffected, as were the defensive sectors such as healthcare, food, and most consumer basics.
Interestingly, North America is one of the areas least likely to be affected by the pandemic and quarterly dividend payments allow for any suspensions to be relatively short-lived.
“On average US companies also spend more of their free cash flow on share buybacks, as opposed to dividends, unlike companies in Europe,” said Sobczak. “As a result, share buybacks, rather than dividends are being eliminated by management in the US, in an effort to preserve capital.”
Income investors typically don’t consider the US, but heavy weightings towards technology and substantial revenue reverses could begin to change opinions.
In contrast to the quarterly payments in the US, most European companies make just one dividend payment per year, mainly during Q2.
However, it’s worth noting the possibility that some suspended dividends may yet be paid later in the year rather than end up being forfeited altogether.
In the US, the average yield sits at 2.2 per cent and there are only three trusts yielding more than 1.5 per cent.
Below, Kepler’s Sobczak highlights trusts focused on the US that might be good alternatives for income-seeking investors.
BlackRock North American Income Trust
The highest yielding trust in the AIC North America sector with a yield of 5.21 per cent, BlackRock North American “has clear appeal for income-reliant investors”, according to Sobczak.
Managed by Tony DeSpirito, David Zhao and Franco Tapia, the £137.6m trust invests in a portfolio of income-paying large-cap US stocks.
“In 2019,75 per cent of the full year dividend came from portfolio income, the remainder from capital and reserves,” noted the Kepler analyst.
Over three years, the trust has made a total return of 10.70 per cent compared with a 23.06 per cent gain for the average IT North America peer and 6.83 per cent for the Russell 1000 Value benchmark.
Trading at a discount of 9.4 per cent to net asset value (NAV), ongoing charges of 1.09 per cent and is not geared.
North American Income Trust
Managed by Standard Life Aberdeen’s Fran Radano and Ralph Bassett, the $402.4m North American Income Trust has a yield of 3.8 per cent.
“The board and managers have made excellent progress in building up a significant revenue reserve – almost a full year’s worth of dividends,” said Sobczak. “Whereas five years ago they had nothing in their revenue reserves.”
Both BlackRock North American and North American Income Trust write options as a way to enhance income. “The greater volatility of markets recently has increased the level of premiums received for this and, as a result, has made the dividend-paying capabilities of the trusts more reliable,” added the Kepler analyst.
Performance of trusts vs sector over 3yrs
Source: FE Analytics
The trust has made a total return of 14.83 per cent over three years compared with a 35.82 per cent for the S&P 500 benchmark.
North American Income Trust is currently trading at a discount of 4.5 per cent to NAV, is not geared and has ongoing charges of 0.91 per cent.