Since the start of the UK’s coronavirus outbreak, the dividend landscape has changed drastically with the crisis causing companies to cancel their dividend payments, even those that have been seen as reliable sources of income for decades.
It hasn’t only been the companies under pressure to react to the economic crisis, as the Investment Association (IA) suspended the yield requirement for both the IA UK Equity Income and Global Equity Income sectors for 12 months, aiming to elevate some of the short-term disruption being caused.
Looking across the 10 biggest UK equity income funds and trusts, interactive investor (ii) found the five most common holdings for each and has examined the state of their dividends today.
Going into IA UK Equity Income funds first, the 10 largest are: Artemis Income (£4.4bn), Threadneedle UK Equity Income Fund (£3.6bn), Trojan Income (£3.5bn), JOHCM UK Equity Income (£2bn), Royal London UK Equity Income (£1.9bn), Jupiter Income Trust (£1.3bn), Marlborough Multi Cap Income (£1.2bn), Schroder Income (£1.2bn), BNY Mellon UK Income (£1.1bn) and Aviva Investors UK Listed Equity Income (£1.1bn).
Comparing the funds’ holdings, ii found that GlaxoSmithKline (GSK), Imperial Brands, BP, Phoenix Group and AstraZeneca were the most commonly held assets.
Amongst these five ‘shared favourites’ only cigarette maker Imperial Brands – formerly known as Imperial Tobacco Group – has cut its dividend, reducing it down by a third reportedly to help deal with the £14bn worth of debt it is shouldering and insulate itself from the coronavirus crisis.
This is the first dividend cut the company has made since listing on the London Stock Exchange 24 years ago.
But, as ii found, it was the opposite with insurance company Phoenix Group and oil and gas giant BP, which maintained their dividend increases from earlier on this year.
This was a surprise on the part of BP as many expected the company to follow suit of oil & gas peer Royal Dutch Shell, which cut its pay-out by two-thirds several weeks ago. This was its first cut since World War II and was made to cope with the economic impact of coronavirus and crashing oil demand.
GSK and AstraZeneca have not changed their dividend payments.
Going onto the investment trust space and the 10 largest UK equity income strategies are: Finsbury Growth & Income (£1.8bn), City of London (£1.5bn), Edinburgh Investment (£843m), Law Debenture Corporation (£632m), Temple Bar (£571m), Murray Income Trust (£506m), Perpetual Income & Growth (£494m), Merchants Trust (£486m), Dunedin Income Growth (£382m), JPMorgan Claverhouse (£348m).
Trusts appear sharing the funds’ favouritism for pharmaceutical firms GlaxoSmithKline and AstraZeneca, which sit alongside British American Tobacco, RELX and Royal Dutch Shell as their most common holdings.
As mentioned above, Royal Dutch Shell has been one of the UK’s highest profile dividend cuts. However, RELX’s full year dividend rose 8.55 per cent while and British American Tobacco’s dividend payments remain stable, according to ii.
Richard Hunter, head of markets at interactive investor, said: “In age of ever-decreasing dividend circles, some stalwarts remain.
“These stocks continue naturally to attract income-seeking funds and trusts, with the nuance being that the direction of travel for these dividends differs.”
He added that whilst some have been able to maintain or even increase their dividends, this doesn’t mean the companies that reduced their pay-outs are less valuable.
“Even those which have decided to reduce their dividend for reasons of fiscal prudence still offer attractive yields in the current environment,” Hunter said.
“Shell, for example, has an implied yield of 3.5 per cent despite having cut its dividend by two-thirds, while Imperial Brands still has an implied yield of a whopping 8 per cent, even after having cut its pay-out by a third.”
Hunter finished: “Questions are increasingly being asked about sustainability, such as with BP given its recent £14bn write-down after taking a long-term view on a lower oil price.
“Even so, the defensive nature of a number of these companies should hopefully leave them well placed to continue their status as dividend cornerstones, much to the relief of increasingly starved income-seeking investors. But one thing we have learned this year is that anything can happen.”